The other reason why false negatives are mostly irrelevant is because the hash DB can be updated to include them, so the risk of storing them in iCloud remains the same.
The encrypted list is stored on the devices for security and performance reasons: otherwise it would be too easy to ship people customized lists with arbitrary images. You can't just rapidly revise the list without undermining the privacy protection here.
Also the space of modifications is gigantic, for any given image there should be millions of differently hash variations which can be reached without major visual damage. (at least for neuralhash the figure is billions)... so you can't just stick all of them in the database.
You could stick widely circulating variations in the database, however... sure.
Are you saying the hash DB can't be updated or that already uploaded photos won't be compared to hash updates?
It can be updated-- at some cost. But if it is very frequently updated then the protection against receiving a targeted list is lost.
To state it another way: Users ask "Why won't the government order apple just gives me a list of the hash of every political image on the internet in order to expose my files?" and the answer is that the database is part of the OS, common to everyone, updated infrequently, so it can't be used in targeted attacks. That protection is lost if the database is frequently updated.
It's also true that already uploaded photos won't be rescanned, but that wasn't the point I was trying to make.