Your points aren't rational honey.

Did you completely miss how their 'friendship' started? Dating site. Emotional affair.

NOPE. There isn't any part of this friendship that isn't inappropriate.

When I say lack of connection I mean that your husband and his friend probably wouldn't behave this way if they saw you and you spoke genuinely about how you feel
It's also likely that his friend will understand how you feel and enforce the boundaries of their relationship if your husband fails to.

Oh honey no. No. Just no. How delusional are you? This woman knows about their relationship and has from the very start.

you should be cognizant of the fact that by giving him an ultimatum you demonstrate that your discomfort with his friendship outweighs your investment in the relationship.

You kind of have that backwards. The fact that she has to give this ultimatum at all demostrates that his friendship outweighs his investment in the relationship. If he gave a flying fuck what so ever, he'd have shut her down and cut her out RIGHT AWAY.

Ohhh man I feel bad for whoever gets stuck with you if you legitimately think ANY of this is okay or rational. NONE of it is.