iPhone FaceID stopped working after 13.5 update––is this a bug or hdw failure?

May vote is neither.

It’s not a software bug in that release - we would have floods and floods of people with issues if there were a bug breaking FaceID.

It’s not likely a coincidental hardware failure. Of course if you suspect that seek hardware service immediately.

It’s much more likely some general corruption on the combination of your software, your apps, your data and the device. The steps to troubleshoot that would be to get a good backup, erase all settings and content, set up FaceID alone before you restore any data. If that doesn’t work, then restore the device entirely from a computer. Repeat the “set up nothing except FaceID” test.

Based on that you may have hardware - seek service knowing you have a backup. Or you may find the hardware and software work, then decide to erase and try restoring your backup or just setting up new.