U.S. Threatens Sanctions Over AI Model Distillation, Merging IP and Export-Control Enforcement

Treasury Secretary Bessent warned on July 22, 2026 that "open source is not open season on American IP," threatening Entity List designations against Chinese AI firms conducting industrial-scale model distillation. The move merges IP protection with export-control enforcement, lowering the evidentiary bar from hardware smuggling to software-level conduct detectable through API logs — a structural shift in the U.S. sanctions toolkit.