Policy changes for users require a logout and log back in. For computer settings, you need a reboot. Unlike control panel, or settings, they are not always applied immediately.
I the VM settings, turn off any 'Hardware Virtualisation' setting to fix this error.
Also, use Generation 1 type VM to support 32 bit operating systems
It is possible to create a local account, but requires some manual intervention. Disconnect PC from network/internet, enter a invalid user/pw combo to get an error, and then you should be able to enter a local account details.
See How to set up Windows 11 without a Microsoft account
You can get 23H2 if you have joined the Windows Insider or that you have enabled 'Get the latest updates as soon as they are available' in the Settings, Windows Update. It also depends on which area, country you are in as MS rmay have a region by region rolling release of the update, so not...