I am afraid it’s in the latter case, as the system explicitly tells you that without the bootloader locked/verified boot, your data is not safe to be kept in the phone regardless of the encryption status. Until it’s proven otherwise, this is my conclusion, which is also be in line with Android security team.
I am with the stock ROM with verified boot intact, as this prevents unauthorized access to user’s data on the phone, regardless of the encryption implementation, i.e. a cripple/flawed encryption implementation would be covered by the fact that if the system is still intact, any tampering on the system would result to data loss as it’s the fundamental design of Android security.
Moreover, with the stock Android 10+ ROM (yes, I know, with Google Play Services), the user is still receiving security update, OS patches, etc. through Google Play system update AKA Project Mainline, even when the device itself is EOL from its manufacture.
But I can’t find any info regarding the EOL schedule of Google Play system update. I am not sure whether Android 10 is still getting the update through this channel, though.
And there’s also another caveat: some devices are not (fully)compatible with Google Play system update. For example, some Sony phones, see here, are currently stuck at May 2020 due to a boot loop issue. Samsung phones, even with their recent models, are not receiving Google Play system update for some unknown causes, see here. I think only the devices in this category are worth the risk of using a custom ROM with an unlocked bootloader.
But then again, it’s not only about risking with the unauthorized total data and phone access. In an extreme scenario/being the target, if the device is confiscated, there’s a risk where forged evidences could’ve slipped through with all online data/sign-in in the device intact (for further investigation). That would assume there’s no tampering on the device and can be used against the user in the court. None of this would be an issue if the device has a locked bootloader, since any tampering would leave a trace, and all user’s data would be erased.