The question can be seen as having two complementary answers. Answer C (provide each application with a managed identity and configure storage1 to use Azure AD authentication) is the essential part of the solution to ensure that each application can securely authenticate itself and access data. However, answer D (giving each application an encryption key) is also an important part of the solution because encryption helps ensure that only the application that wrote the data can read it.
Therefore, both answers C and D are complementary and together form a comprehensive solution to meet the requirements of the question. Microsoft's official answer seems to focus more on the managed identity part (answer C), but the community also highlights the importance of encryption (answer D), which is valid for ensuring data security.