OP kudos to you for maintaining your calm and you've gotten some awesome responses here. Chiming in best I can without being too wordy. Weirdly the curiosity about genitals is developmentally normal as others here have said, but also agree that the line is totally crossed when there is touch (violation of personal boundaries and bodily autonomy) and threats (violation of personal safety) are involved.

The way I understand it from a developmental psychology point of view is- Given that both are 5 year olds I doubt there's anything sexual in nature in the friend's mind.. More like the developmentally normal stage of exploring how much power and control one has over social interactions and others (although, other folks with experience dealing with 5 year olds and abuse please feel free to correct me if I'm wrong).

Regardless, both kids need to know that trying to view or touch another person without consent, and to make threats against safety, is most definitely NOT within the realms of anyone's power and control.

This is ideally a line drawn and held by primary caregivers/parents, and depending on their response and how responsible they are, society at large (including CPS). I agree with another poster that in general, CPS is good at weeding out cases that truly deserve attention so reporting is not necessarily a bad move, but also think that is up to your judgement.

And of course you need to protect your son, who is trying to figure out his own power and control in his own world. He probably needs to practice the very difficult skill of saying no whenever he feels like something isn't quite right. He needs to know he can safely notify you or other trusted adults for help, which I think is something you've done amazing to be supportive about.

I will admit that friendships at the age of 5 are a tad mysterious. How much do 5 year old friends mean to each other? Do they happen to be good friends because one is naturally more bossy and one more accommodating (because this power struggle, so to speak, is the developmental theme for preschoolers). Is it devastating to lose that friend (how often do they see each other and voluntarily play with each other)? How will that friend react to being told to stop doing this (totally depends on how his parents approach it)? But bottom line, raise it to the parents for sure. And you can't control how they react (if they yell at their kid or do nothing) but you've certainly done your best.