First off, don't blame yourself for not grabbing her phone. I get how the situation was shocking.
And no, you don't ignore it and most grandmothers don't do this. Of course, just being a grandmother doesn't make a woman a saint. So, you need to evaluate: in the past, how has your MIL's language been? Is it frequently coarse, vulgar, inappropriate, or when she said "he has a big ... ", was that a complete shock? You've said you're not overly fond of them, but is that because your MIL frequently uses rude language, or because her meatloaf is always over-seasoned and under-cooked or because she has weird taste in gift-giving? Some people are just accustomed to using un-censored language, and it doesn't matter if they're in a restaurant, or talking about their grandchild, or just conversing with the mail carrier. For others, if they were to say "damn it", the whole world would stop and everyone around them would know something is really seriously wrong. Plates would crash to the floor. Conversation would cease. So, what kind of vocabulary does your MIL routinely have?
You need to communicate with other family members who have babies, whom this lady might visit. You need to warn them. Don't speculate, don't assume anything, simply tell them that your MIL's language about your baby was inappropriate, and that you caught her taking close-ups of his genitals, although you don't know the reason.
Make sure that you're being very clear with your husband. Your baby's genitalia could end up on social media, identifiably posted by his grandmother, and that doesn't go away. Is he ok with that? If she had an old-fashioned Polaroid camera, or one with film, maybe the photo wouldn't see the light of day, but since she has a smartphone with a camera, Facebook and Instagram are right there. When you take a photo, and view it in the gallery, phones often prompt you to "share this" and it's a quick click and it's now out there for everyone to see.
Monitor her internet activity. Ask for her phone and ask to see that the photos were deleted. Be clear and direct with her if no one else will. It's your baby. Call her on it. Don't tiptoe around. If she visits again, and wants to change the diaper, don't say "oh, that's ok, I was going upstairs anyway." Say "NO. Last time you took close-up photos of what should be private, and you're not going to have the opportunity again." Again, don't extrapolate. Don't accuse her of sharing them, unless you have seen them. If you don't know what she did with the photos, don't say "you were probably going to ..." Just state what you saw. Do it firmly but not rudely.