After STARTTLS you got the response 220 2.0.0 SMTP server ready, which means Exchange is waiting for your server to establish the TLS negotiation.
Please refer to rfc3207.
After receiving a 220 response to a STARTTLS command, the client MUST start the TLS negotiation before giving any other SMTP commands.
While since you are seeing the AUTH LOGIN option, I suppose you do not have "Offer basic authentication only after starting TLS" checked.
If you would like to authenticate without TLS, you can also use AUTH LOGIN then input credentials encoded with base64.
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