Treasury threatens sanctions over alleged AI model distillation by Chinese startup Moonshot

The U.S. Treasury is threatening sanctions against Chinese AI company Moonshot after White House officials accused the startup of conducting large-scale distillation of Anthropic's Fable model. Treasury Secretary Scott Bessent posted on X that "open source is not open season on American IP," warning that "sanctions and Entity List designations will be on the table" for firms that cross the line into IP theft.

The move follows an earlier statement from Bessent that the U.S. would examine Chinese open source models for signs of IP theft. White House science and technology policy chief Michael Kratsios specifically called out Moonshot, alleging the company acquired Nvidia GB300 servers (part of the Blackwell generation, banned for sale to Chinese firms) and accessed them in Thailand, likely to train its models. The GB300 servers are subject to U.S. export controls.

Model distillation is a common technique where a smaller model learns from a larger model's outputs. While often legitimate, it can also infringe on IP. Moonshot recently released its Kimi K3 model as open-weight, and its capabilities have raised questions about the business models of leading U.S. AI labs. Some experts doubt that K3 could have been developed primarily through distillation from Fable, which has only been publicly available since July 1.

This episode has reignited debate in Washington over the influx of Chinese open-weight models. Some, like former White House AI adviser Dean Ball (now at OpenAI), have argued for restricting or banning their use to preserve America's technological lead and mitigate national security risks.