You should probably clarify that what you’re talking about here is races being “illegal” within the setting (that’s what MCDM does with dragonborn). Players are still allowed to pick the race, but they are signing up for extra hardship, kinda like the Nosferatu in V:TM.

As for my answer: I don’t make any races outright illegal in the setting, but I do ban certain ones from being chosen by the players if that race doesn’t exist in my setting. I do have NPCs treat PCs differently based on their race, but typically only using obvious fantasy tropes, so that people know what they’re signing up for.