Since the watermarker runs locally, you could also do the reverse: generate some porn with a different open model, then run that code to tag it as "Content watermarked by Microsoft Responsible AI"

Probably both so they can change what they censor without waiting for you to run windows update and also so they can collect your information (IP, timestamp, etc) to associate with whatever you did

I don't think they use a model that would run smoothly on most hardware that normal people use.

Besides, you need to sign-in and pay to use that feature. It's very obvious that's not local.