@MS Techie
Thank you for your time and patience throughout this issue, I received a response from our Key Vault SMEs and will post their response below.
KV team update:
It's in theory possible using the .NET Microsoft.Azure.Services.AppAuthentication library as long as the on-prem AD environment is synced to AAD and the on-prem machine is a domain-joined machine as explained in here. However, for local development, the easiest and recommended way is to use VS credentials.
You should also take into account that the Microsoft.Azure.Services.AppAuthentication library, is no longer recommended to use with new KV SDK, instead, you should be using the new Azure Identity client library available for .NET, Java, TypeScript and Python and should be used for all new development.
If you have any other questions, please let me know.
Thank you for your time and patience throughout this issue.