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There's an expectation that what you upload on the cloud will get some scrutiny, being on somebody else machine.

But here they'll scan the local files on your own device, that you supposedly "own" (but not really, because Apple already locked it up to make sure you can only install stuff they have approved and taken a cut off)

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this is false. it's not scanning your local files.

only the files you upload to apple photos.

The compute is on the edge; the data is local, just marked for cloud sync. This way, you get to pay for the capital and energy costs of the scanning instead of Apple.

Am I misunderstanding that this is the literal last step for a photo destined for iCloud, and a way to keep apple from having to decrypt your private photos to scan them? With iCloud sync off, does this scan still happen?

Correct. Functionally there is no difference to what Google does with their own cloud photo service. The only difference is where the processing occurs.

Turning off cloud photo syncing will disable the scan on both Android and iOS.

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