The hash matching part of this is a red herring. The real issue is that if a hash matches, there's now a mechanism to upload the image in question from your phone, unencrypted, without your consent. What assurance is there that the hidden upload mechanism can't be used to upload other files on demand? If a mechanism is built into the OS that can exfiltrate files on demand, what's to say there even has to be a hash match? Or that iCloud has to be active? What's to stop any government from going to Apple and saying "we know you have this ability, give us all this user's files." Nothing.
The exfiltration mechanism is the problem. If this were saying a hash match could be used to obtain a search warrant, that would be bad, but it would be far less egregious a breach of security and privacy than Apple adding a backdoor to just grab anything it likes.