I had the same problem. The sustain pedal was not working in Cubase Artist 8.5 with my AKAI MPK261. Standalone Synths (e.g. Applied Acoustics Systems Lounge Lizard EP) worked just fine. Also MIDI-OX showed perfectly normal MIDI data. Interestingly, the MIDI Activity indicator (in the transport toolbar) showed activity. So Cubase was clearly receiving something but not forwarding it to the instruments! The Cubase MIDI Monitor however did show no MIDI data. So Cubase was clearly swallowing signals without being to consious about it. After an allnighter I have found out where. Here it is: You need to navigate to (and I have that only in German):
Menu Geräte → Geräte konfigurieren → Fernbedienungsgeräte → “Spur Quick Controls” and set “MIDI Eingang” to “nicht verbunden”.
In an english Cubase version that is probably as follows:
Menu Device - Configure device → Remote Control Devices → “Track Quick Controls” and then set “MIDI Input” to “not connected”.
As I said, this took me the better part of a Saturday night, so hope this helps as I have found this sort of question many times in the internet but never this answer if any.