I don't think there is a way to have both the option to host images and have zero risk of getting such image uploads. You either completely disable image hosting, or you mitigate the risk by the way image uploads are handled. Even if you completely disable the image uploads, someone might still link to such content. The way I see this there are two different aspects. One is the legal danger you place yourself when you open your instance to host images uploaded by users. The other is the obvious (and not so obvious) and undeniable harmful effects contact with such material has for most of us. The second, is pretty impossible to guarantee 100% on the internet. The first you can achieve by simply not allowing image uploads (and I guess de-federating with other instances to avoid content replication).

The thing is, when you host an instance of a technology that allows for better moderation (i.e. allowing certain kinds of content, such as images, only after a user reaches a certain threshold of activity), actually helps in a less obvious manner. CSAM is not only illegal to exist on the server-side. It's also illegal and has serious consequences for the people who actually upload it. The more activity history you have on a potential uploader, the easier it becomes to actually track him. Requiring more time for an account before allowing it to post images, makes concealing the identity harder and raises the potential risk for the uploader to the extend that it will be very difficult to go through the process only to cause problems to the community.

Let me also state this clearly: I don't have an issue with disabling image uploads here, or changing the default setting of instance federation to a more limiting one. Or both. I don't mind linked images to external sites.

I am sorry you had to see such content. No, it doesn't seem to go away. At least it hasn't for me, after almost 2 decades :-/