Good arguments. I think I am convinced that both cases should be illegal.
If the pictures are real they probably increase demand, which is harmful. If the person knew, then the action therefore should result in jail and forced therapy.
If the pictures are not, forced therapy is probably the best option.
So I guess it being illegal in most cases simply to force therapy is the way to go. Even if it in one case is "victimless". If they don't manage to plausibly seem rehabilitated by professionals, then jail time for them.
I would assume (but don't really know) most pedophiles don't truly want to act on it, and don't want to have those urges. And would voluntarily go to therapy.
Which is why I am convinced prevention is the way to go. Not sacrificing privacy. In Norway we have anonymous ways for pedophiles to seek help. There have been posters and ads for it a lot of places a year back or something. I have not researched how it works in practice though.
Edit: I don't think the therapy we have in Norway is conversion therapy. It's about minimizing risk and helping deal with the underlying causes, medication, childhood trauma etc. I am not necessarily convinced that conversion therapy works.
I see the issue with how much of a crime is enough for it to be okay, and the gray area. I can't make that call either, but I kinda disagree with the black and white conclusion. I don't need something to be perfectly ethical, few things are. I do however want to act in a ethical manner, and strive to be better.
Where do you draw the line? It sounds like you mean no AI can be used in any cases, unless all the material has been carefully vetted?
I highly doubt there isn't illegal content in most AI models of any size by big tech.
I am not sure where I draw the line, but I do want to use AI services, but not for porn though.