Using classic Outlook for Windows in business environments
AnotherBug,
Clear* connecting to Outlook.com means basic auth. If you are connecting Outlook Desktop to Outlook.com make sure to use the default Add Account experience that will add it as an Exchange account. This is different than EAS and is the only connection option that will connect from Outlook Desktop to Outlook.com with OAuth. Please do not use EAS in Outlook Desktop for Outlook.com or M365.
Concerning the proxy also known as cloud cache there is nothing nefarious about it. If Microsoft abused customer data in any way it would have issues with regulators. Because of this it's actually easier to get into Fort Knox than to access customer data. No one at Microsoft can go look at your email data and no one has any interest in that. The only reason for cloud cache is to make it so Outlook is connecting to your third-party mailbox so that it appears as an Exchange account so that Outlook can provide you with all the features that come with it. This article explains what all cloud cache is for, Sync your account in Outlook to the Microsoft Cloud - Microsoft Support.