VERY small city purely because of the level of development

Blackwater is a city. The map of Blackwater that's in Ross' office in Undead Nightmare has the text "City of Blackwater" at the top of the frame.

It's a city as much as Saint Denis is a city in 1899. Although much more cleaner.

Several small towns are also called cities in real life...

Blackwater is like Armadillo to Saint Denis in RDR2 while Armadillo is like Tumbleweed in RDR

Its a city that's limited by the technology so they had to make it small