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That bill was DOA, posturing by a politician to appease his left flank. Nobody took it seriously and his party is no longer in power.

But it's still illegal to publish pornograpy in Iceland isn't it? http://www.althingi.is/lagas/nuna/1940019.html#G210

Yes, it does impinge on freedom of speech locally. No politician is going to move to abolish it (for now), but enforcement is next to non-existent.