They can definitely inject the ad into the video stream on the server side and still correctly classify it as ad. Some other platforms already do that. From my own experience, many podcasts monetize like that. The ads get injected by their distributors. Leads to German ads before English speaking podcasts, if you stream them from Germany. However, their ads are skippable. Wouldn’t be surprised if YouTube somehow made that impossible, too.

I can’t see how they will not be able to properly disclose the ad, they will just do that without breaking a videostream, and in a most machine unfriendly way they can come up with. It’s going to be like captcha but saying “this is an ad”