US Treasury threatens sanctions against Chinese Moonshot over distillation of Fable model

U.S. Treasury Secretary Scott Bessent on Wednesday escalated warnings to Chinese AI companies, saying sanctions remain on the table after a White House official accused Moonshot of improperly distilling Anthropic's Fable model. Model distillation is a common AI training technique where a smaller model is trained on the outputs of a larger one. While this process can violate intellectual property rights, it is also widely used as a legitimate optimization method. "Open source is not open season on American intellectual property," Bessent wrote on X. "When Chinese firms conduct covert, industrial-scale distillation attacks that cross the line into IP theft, sanctions and Entity List designation will be on the table." Earlier this week, Bessent said the U.S. government would investigate open-source models from China for intellectual property theft and impose sanctions if found. Hours before that, White House Office of Science and Technology Policy Director Michael Kratsios accused Moonshot of large-scale distillation of American models. He claimed Moonshot acquired Nvidia GB300 servers and accessed GB300 in Thailand, likely to train its AI models, raising questions about possible violations of U.S. export control rules. The GB300 servers are part of the Blackwell generation, the sale of which to Chinese companies is banned. Some experts dispute the claim that Kimi K3 was developed primarily through distillation from Fable, which has only been available since July 1. Moonshot released K3 last week as an open-weight model, and its advanced capabilities have challenged the business models of leading U.S. AI labs. The incident has also intensified the debate in Washington over the influx of Chinese open-source models. Some, including former White House AI advisor and current head of strategic futures at OpenAI Dean Ball, have called for restricting or effectively banning the use of Chinese open-weight models to preserve America's technological edge.