A discriminatory term used towards transgender people who don't feel gender dysphoria, or transgender people who don't fit in a gender binary. It's a shortened version of "too cute to be cis" which is also a phrase used to bully these people.
"God, James is such a Too Cute!"
"Hey, just 'cause they're a demiboy doesn't make him less trans then you."
The use of the word "blue" to refer to sexually explicit content was first recorded in Scotland in 1824. "Blue" meant "lewd" because prostitutes dressed in blue gowns.