1. The watermark only applied to AI-generated contents through the in-app AI (copilot/cocreator, etc). If you draw something by hand it is not watermarked
2. Privacy implications: I believe your MS account is linked to the prompt and the GUID. And the GUID is embedded into the image as both an insivible watermark and a file-level C2PA metadata. I did not write about this very deeply in my blogpost, but when I do an image generation, it deducts my AI credits (yes, MS gives you like 60 free AI credits), so MS surely knows where the prompt is coming from. Though I am not sure about their storage and retention, e.g., do they actually store the data, and if they do, for how long, etc