In many ways Mutagen and VSCode's remote extensions are the same idea, with trade-offs in terms of flexibility vs. integration.

Shared systems with multiple non-admin users was one of the original motivating use cases for tighter default permissions.

I don't think there's any scenario where one can perform truly secure development work on an untrusted system. You could certainly store encrypted code in an untrusted location, but there's not much you could do with it on that system (without a hypothetical compiler or tool that maybe supported some sort of homomorphic-encryption compilation operations?). Even decryption on-the-fly for processing by regular tools wouldn't be secure on an untrusted system. And running any code there would be equally insecure.

I'd imagine that for any seriously sensitive work, one would only want to work in highly controlled, trusted, and firewalled environments. If there's a scenario I'm missing though, definitely let me know.