The US government is escalating its response to Chinese AI models like DeepSeek and Kimi, imposing new restrictions after months of warnings about so-called 'distillation campaigns.' The crackdown, which began in earnest in July 2026 with House committee probes into US firms using Chinese models, has inadvertently boosted decentralized AI tokens as investors seek alternatives outside government control.
The distillation dispute and Washington's response
Distillation refers to the practice of querying a powerful AI model millions of times to replicate its capabilities in a smaller, cheaper model. US officials have accused Chinese AI labs of using this technique against American frontier models since April 2026, when the White House and State Department first flagged the issue. In response, companies like Anthropic and OpenAI restricted foreign access to their models, and several government departments internally banned Chinese models such as DeepSeek. By July 2026, House committees launched formal probes into US companies using Chinese models like Kimi, tightening the regulatory noose.
Challenges of enforcement and unintended consequences
AI policy experts note that fully banning open-weight models is 'ultimately impossible' due to their public availability, and legal experts have raised First Amendment concerns about any outright prohibition. Federal procurement bans, which would prevent government agencies from purchasing or using Chinese AI models, are reportedly the most viable option under discussion. Meanwhile, US restrictions on its own advanced closed models have unintentionally driven American companies toward cheaper Chinese open-weight alternatives, which can be downloaded and run locally, bypassing API blocks.
Decentralized AI tokens emerge as winners
As US-China AI tensions escalate, tokens linked to decentralized AI infrastructure have posted notable gains. Venice's VVV token rose approximately 14% in late June 2026, while Morpheus' MOR token surged roughly 21% over the same period. The potential for US federal procurement restrictions presents a double-edged dynamic: while limiting Chinese model use in government could reduce distillation risks, it may also drive more users—including enterprise customers—toward decentralized alternatives that operate outside any single jurisdiction.