Unfortunately, my favorite piano doesn’t have a variable sustain. Sustain in Cubase is handled like any other controller. It makes it more difficult for me to use than a simple ON/OFF switch would be.
+1
I apologise in advance but this does make me laugh 
… Cubase used to handle Sustain and Sostenuto like simple On/Off, but was changed to Continuous as a result of… user requests 
. (because there are indeed sustain pedals that deal with that, and piano instruments that are indeed capable of responding to “half pedalling”)
A simple option in the MIDI preferences would fix that. You have a half-pedal-able sustain pedal, leave it as it; you don’t switch it to binary (0/127) mode.
Is it possible to change the behaviour of the sustain pedal to on/off in cubase 8.5?
Not exactly, in the way I guess you are hoping for, but, if your sustain pedal is actually generating continuous data values, you can use the MIDI Input Transformer, to transform incoming CC#64 events, such that, for example, values less than 64 become zero, and values equal or higher than 64 become 127.
Obviously, this will only be relevant for incoming MIDI data… it won’t convert (on the fly) any sustain data you actually insert with the pen tool (although you can correct it afterwards, in a similar way, using the Logical Editor).