[networked]

>I don't understand the need for this.

The killer app for this would likely be data leaks and piracy.

>while hosting non-image files on image file hosts technically might not be illegal, it still essentially is abusing a free service

Those are image files, just not ones meant to be directly viewed by humans. I wonder how many image hosts explicitly forbid such images from being hosted in their ToS. If the idea behind this spreads I would expect many of them to do so.

Edit: IANAL, but I wonder if it would be hard to define legally what exactly those images are. If you say they're images not meant for human viewing, well, what about a photograph of a printed QR code? It need not only show a QR code; it can be an otherwise aesthetically pleasing picture that also features a QR code somewhere. Same with this encoding technology: what happens if instead of dedicating the whole picture to the encoded binary data you embed it in a larger artistic image?

[csense]

You're thinking of steganography [1], hiding the existence of information in an image (or other medium).

I'm aware of at least one case where Russian spies were known to have actually passed messages this way: "they embedded coded texts in ordinary-looking images posted on the Internet," according to the NYT [2].

[1] http://en.wikipedia.org/wiki/Steganography

[2] http://topics.nytimes.com/top/reference/timestopics/subjects...

[networked]

>You're thinking of steganography

Not quite. Having a QR code featured in a photograph isn't steganography since the existence of information is hardly hidden at all. Rather than hiding the information's existence what I'm considering here is how you could make it legally difficult to unequivocally prohibit spreading information that's in plain sight (think "Free Speech Flag" [1]).

[1] https://en.wikipedia.org/wiki/File:Free-speech-flag.svg