I mean you could also go with a more sane model that still represses the idea while allowing some controlled environment for people whom it can really help.

You could start by not prosecuting posession, only distribution. So it would still be effectively "blocked" everywhere like it's (attempted to be) now, but distributing models for generation would be fine.

Or you could create "known safe" (AI generated) 'datasets' to distribute to people, while knowing it was ethically created.

is used as both a currency within those circles to incentivize additional distribution, which means there is a demand for ongoing and new actual abuse of victims

A huge part of the idea is that if you create a surplus of supply it cannot work as a currency and actual abuse material will be drowned out and not wort it to create for the vast majority of people - too risky and irrelevant if you have a good enough alternative.

You're definitely right though that there would have to be more considerations.