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So it's watching my bash terminal? Does it send my passwords on over to your servers when I ssh somewhere without keys?

No! If you can't see it (as visible chars) on your terminal then Kite is not seeing it.

It sees all the visible chars? Not just what I type? So every time I ls all of my filenames and dirs get sent?

That might be worse.

This seems dubious. Does that mean key loggers can't see it?

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