I’m not saying that there isn’t room for improvement for the localization.
Still, it is incorrect to say that files have to be “local” or available offline. It is required, though, that there are no pending changes and the full directory tree can be read and modified from a process traversing it.
If there were indeed files not listed in the ciphertext directory, I wouldn’t consider this fully synchronized. I can only hypothesize why this wasn’t the case and frankly it doesn’t matter.
Migration is known to work with file contents offloaded using OneDrive’s “Files on Demand” as long as directory structure is complete: