You don't need RDS licenses, if you are using Azure Virtual Desktop, with a client OS - the users just need to have the appropriate licenses (https://azure.microsoft.com/pricing/details/virtual-desktop/?WT.mc_id=AZ-MVP-5004796)
For the Smart Card error, do you need it? It might be worth disabling the service- or making sure Smart Card authentication is turned off in the Azure Virtual Desktop host pool (https://techcommunity.microsoft.com/t5/azure-virtual-desktop/new-feature-smart-card-authentication-for-windows-virtual/m-p/2323226).
Take a look at this: https://answers.microsoft.com/en-us/windows/forum/all/windows-10-smart-card-error/5399955b-c393-4737-b401-668196cbaed1