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Would it be possible to capture video by using headless browser and rendering the video element & audio to file? Of course, this will induce some quality loss if encoded to lossy format again. But would effectively be "legal" as the tool would run the youtube's "DRM" and be not distinct from normal browser in any way. I guess the headless browser could maybe perhaps just download the stream to disk as well.

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Yes, but in that case you need to reencode every video in realtime at playing. Maybe you speed up the process with capturing the different parts of the video in parallel and concatenating the parts in the end, but if you want good compression then you need to reencode the whole video again. This is far from just getting a video file from a CDN server. If you want to try it, just few line of code with MediaRecoder API in any browser.

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