It is only applied for photos which are going to iCloud. If they change that, then we should be really worried. Current method is only pure improvement if leave all speculation out of it.
I am generally in agreement with you (and have made similar arguments, if you look at my post history), but the "expand in unspecified ways" is a bit ominous. Committing to only scanning photos that are being synced to the cloud (effectively, keeping parity with what everyone does, just doing it on device at the time of upload instead of in the cloud) would be really welcome here.