1. The packing material is not to make them light tight. The channels alone do this. It's to improve the camera's resistance to dust.
2. I don't think waxed cotton has these problems
3. If you're getting the dust seal channels moist enough to cause the seal material to mold and rot, you're doing something terribly wrong. (Underwater housings are available for most major SLRs
I've always viewed the buffer of foam or yarn as part of the light tight protection and while some grooves can do the job without the material, cameras where a packing material is used will have a built in tolerance and need for this addition baffling product.
The wax in waxed cotton threads and cords is a bad idea because it does not take a very cold camera or shooting environment for particles to become separated from the mother cord, and you don't want to chance that, at all, finding it's way into the shutter curtains, pressure plate where it can create a drag mark, or into the lens itself.
Wax is a brittle material and I've got some waxed Irish linen cord I've used in several hot/cold conditions, though never as a photographic baffle, and speak from some experience in the cold.
Cotton attracts moisture and holds it, which is why nylon(?) or polyester(?), or silk Tee-Shirts are perfect by some people in hot environments, where humility, sweat producing bodies in particular, activities will become soaked by both sweat and humidity.
Waxed cotton fabric is Also no good for internal baffles.
IMO.