Tensions between the U.S. and China over artificial intelligence have escalated sharply after a White House official accused Chinese AI firm Moonshot of improperly using a technique called model distillation on Anthropic's Fable model. Treasury Secretary Scott Bessent has now warned that sanctions and Entity List designations are on the table if such practices cross into intellectual property theft. Main Developments Bessent posted on X that "open source is not open season on American IP," signaling a hardening stance against Chinese firms conducting what he called covert, industrial-scale distillation attacks. His remarks followed earlier statements this week in which the Treasury Department said it would examine Chinese open source models for signs of IP theft and impose sanctions if found. The White House's science and technology policy chief, Michael Kratsios, specifically accused Moonshot of conducting large-scale distillation against U.S. models. He alleged that Moonshot had acquired Nvidia's GB300-equipped servers and accessed GB300s in Thailand, likely to train its AI models, raising questions about potential violations of U.S. export-control rules. Read also: Tesla Delays Cybercab, Semi, and Megapack Volume Production Beyond 2026 Background Model distillation is a common AI training technique in which a smaller model learns from the outputs of a larger one. While it can infringe on intellectual property rights, it is also widely used as a legitimate optimization method. Moonshot released its open-weight model Kimi K3 last week, and its advanced capabilities have called into question the underlying business models of leading U.S. AI labs. Some experts dispute the idea that Kimi K3 could have been developed primarily through distillation from Fable, which has only been publicly available since July 1. The GB300 servers are part of Nvidia's Blackwell generation, which are banned from being sold to Chinese companies. Why It Matters The episode has intensified a broader debate in Washington over the influx of Chinese open models. Some, including former White House AI adviser and current OpenAI Head of Strategic Futures, Dean Ball, have argued that the U.S. should restrict or effectively ban the use of Chinese open-weight models to preserve America's technological advantage and mitigate potential national security risks. If sanctions are imposed, they could reshape the competitive landscape for AI development, potentially limiting the availability of powerful open-weight models and escalating trade tensions. The stakes are high for both countries, as the outcome could determine which nation leads in frontier AI capabilities. What's Next TechCrunch has reached out to Moonshot and the Treasury for comment. The Treasury's next steps remain unclear, but Bessent's warning suggests that formal sanctions or Entity List designations could be forthcoming if investigations confirm IP theft. Meanwhile, the debate in Washington over restricting Chinese AI models is likely to intensify, with potential implications for global AI development and trade policy.