Their interpretation of California law currently is that it is not specifically illegal, because it doesn’t involve an image of an actual child [...]
Though, taking an actual image of a classmate and face-swapping it onto a naked body or "enhancing" it definitely involves an image of an actual child. Hence it should be illegal. And I think the argumentation is bullshit. It just applies to completely fabricated images. Which I think shouldn't be mixed with deepfakes of actual people which I think is a much more pressing issue. And shouldn't be slowed down by arguing about everything at the same time. The really bad stuff could be addressed right away. And laws are already in place.
The thing with those LLM images is that they aren't real. Yes, you can photoshop a real child's face onto a naked body, but that still does not make the naked body a real naked child. It just makes it a fake computer drawn body with a real face on it. That's about as real as classic face swapping or people drawing / modeling fan art (R34), regardless of the age. Hence why I'd say sexual abuse is very much misleading. Someone generating a bunch of fake images of real people isn't really sexually abusing anyone, just like someone fantasizing real people to be naked or doing sexual things isn't sexually abusing anyone. Those people wouldn't even know it happened at that point. What matters more is what that person does with those images. If they end up using them for things like bullying, blackmail, disinformation etc. then I'd agree there should be definitely legal consequences. But with this current media hysteria about the "AI" topic we'll likely see some very draconic laws due to uninformed / ignorant public pressure.