I'm sorry to tell you that I think you're hosed. I had a very similar problem with one of my original Touch's (now on my third) and I went a
lot higher than level two trying to get an answer. Nevertheless I got the same answer you got - Send it back to Kobo for replacement.
A locked up Touch wouldn't be such an issue if Kobo had a foolproof hardware reset system to bring it back to firmware defaults.
They don't.
Which I have complained about before.
I'm still in process of trying to get an answer about this, and preferably a change of reset system, from person I've talked to at Kobo but at the moment, and for as long as you're in warranty, I think you'll have to send it back to Kobo - and pay the freight for that.
Once you're out of warranty - who knows?