You must encrypt storage1 to satisfy the technical requirements. Which Key Vaults can you use?

All three Key Vaults can be used. KeyVault1 is a standard Key Vault, which supports both software-protected and HSM-protected keys. KeyVault2 is a premium Key Vault, which also supports both software-protected and HSM-protected keys, offering FIPS 140-2 Level 2 validated HSMs. KeyVault3 is a managed HSM, which exclusively uses FIPS 140-2 Level 3 validated HSMs. Azure Storage encryption (Azure Storage Service Encryption for data at rest) supports customer-managed keys stored in any of these Key Vault types: standard Key Vaults, premium Key Vaults, or managed HSMs. Therefore, all three options are viable for encrypting storage1.