There are already several threads on this, I'll just use this one.
We've had this technology for years, decades even. Any time I'm typing a search, it's scanning all my files and show results. But this happened on my device and the results are not send anywhere. I have no problems at all with this.
Apple allows people to opt out by disabling iCloud Photos. So the question everyone should ask is, why they're not simply scanning uploaded files in the cloud? They're scanning on my machine and then report results to the cloud. And that is the problem. They're implementing a mechanism in the core of the operating system that allows them so scan files (hash or not) and then forward information based on that scan to their systems. If anyone can't see the bigger picture and what's happening here in early stages, go wash your eyes with bleach (... no don't do that). When using Twitter, Facebook and Instagram I'm well aware that people can see it and process it in any way they want. I can choose not to use it. Apple lets me disable it for now, but it won't change that fact that I have these mechanisms, actual implemented functionality sitting on my system waiting to send stuff to big brother Apple. The right way would be to offer this as an optional download, a plug-in for those who want it to run on their own device.
I've used Apple for decades, defended most of what they did including the touchbar and butterfly keyboard. I accepted by closing down macOS more and more I can't get some my work/research done anymore and bought additional hardware, while still using Apple. This thing is where I draw the line. They can scan cloud stuff all they want, they can make money off of it. I'm not a die hard open source supporter, even though I have released open source stuff in the past. I'm also all for people selling their ideas/work and make money off it, just like I did. When it comes to the base OS, there has to be a certain transparency of what they do.
This whole thing is not going to fly well with the EU and other countries. So we'll see where it goes. I wouldn't be surprised if this becomes a US (and maybe China/Russia) only thing. I guess Apple will just raise prices to compensate lost customers. It's a shame, because I love what they've done with the M1 and I'm looking forward to the next generations, but maybe, just maybe, it's time to leave the (sinking) ship. It looks like Apple's becoming the thing they fought most back in the day.