They can use any sort of filesystem on the usb hdd which connects to the XKey device.
Drivers exist to read ntfs, fat, ext3 and so on. Judging from the xbox360 version, it runs linux inside, so yeah.. no problem to support ntfs.
On the 'slower' cpu's they could have used, ntfs is still 'fast' enough in read-only modes to approach real life BD read speeds. I've worked on embedded linux systems, from MIPS to ARM and single core ~400Mhz (at least on MIPS) is more than enough to emulate a BD drive. ARM would probably be little faster but it all depends on the chipset used in the XKey.