So I’m still confused! This would be a MacBook Pro, so let’s say lost/stolen of the whole MacBook Pro what would happen?
I know would have “find my Mac” which I believe you can remote erase? That would be first thing to do, but if didn’t have access to this quickly could someone in this target mode without FileVault on get your data, and maybe passwords?
Yes. If you don't enable filevault, despite the encryption, someone with physical access to your computer could run it in target disk mode and get all the data before computer could access any networks to lock itself up.
If you are afraid of that happening, you should set a FileVault password. On a T2 mac, it shouldn't affect performance at all.
All the people saying that it's encrypted are correct, however, because the person accessing your data would have access to both the key stored without password (T2 chip) and data at the same time, he could access it via target disk mode.
The non-password protected encryption would make the data unreadable if you would somehow get SSD chips without the paired T2. Aside from physically unsoldering them, that's a very unlikely scenario in a MacBook Pro, because they're on the same motherboard.
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The issue here is that while it's encrypted, your mac gets stolen with the key which is in the T2, so effectively without password, it's like someone stole a locked briefcase with key attached to it.
It just means that putting same SSD chips to another T2 chip will render the SSD unreadable by them, but this is only applicable to the iMac Pros and Mac Pros as of now.
There's no practical way of separating T2 (encryption) and data (storage) on a MacBook, because they're soldered to the same board.
edit:
The only other thing that's possible is that target disk mode requires Firmware password, if one is set?
But I don't recall having to do anything of such when running my T2 macs in target disk... (I have FileVault disabled)
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Writeup:
I just tried booting my Mini 2018 in Target Disk Mode, with Filevault disabled. Just held T. No password needed. So T2 autodecrypts the drives in target disk if no password is set.
So it's indeed as I speculated. The encryption itself, if not password protected, prevents SSDs to be read by another T2 chip, if you somehow got storage only without T2 chip (applicable in an iMac Pro) but that's it