Is my camera being recorded? Is my AI Friend always watching me?

No. By default your AI Friend does not see or analyze your camera feed. The live camera view is only used to place your Friend in your room. Your Friend can only "look" when you explicitly turn its sight on (for example by tapping the eye button, or by entering an activity that uses sight). That permission is off by default and resets to off every new session, so you grant it fresh each time.