1640 ft (500m) above the takeoff point is only a DJI software limit.
I'm not sure exactly why DJI chose that value. It is not a legal limit. Legal limits in most countries are expressed in height above the underlying ground, not height above takeoff point.
Perhaps DJI thought 500m was high enough to allow you to ascend most hills that could practically be climbed, but low enough to prevent the most reckless altitude violations that some idiots might try. I don't know.
Any fixed limit on the height above takeoff has the effect of making some legal flights impossible, and/or making some illegal flights possible. So the limit will always seem stupid to some. But height above takeoff is the only thing readily measurable by the drone.