I really don't see how this is going to end well, there could be perfectly innocent photos on someone's phone of their own children doing perfectly normal things that kids do. Like a kid running butt naked around the house, or a photo of something like a rash that is sent to a nurse friend for advice on what it is etc. I'm all for protecting children from being abused, but how are they going to filter what is normal…
They are using a library of human verified images to compare the hashes. Probably similar to PhotoDNA[0]. There can be false positives, but AFAIK the algorithms are not trying to identify naked children, but comparing 2 similar image hashes.