The original Dreamcast used Windows CE. If I'm going to make a balls out guess, Microsoft and Sega are going to manufacture Dreamcasts that can read discs, but will use modern hardware and top notch emulation software to emulate Dreamcast games at 4K, ray tracing, and improved framerates.
Online will be fully functional. Sega and Microsoft worked together on design and planning, Microsoft will foot the bill for manufacturing. Most if not all Dreamcast's library will be available digitally on a new store app, on the console.
Extra bonus, Game Pass owners get Dreamcast games as part of the service.