That said, I think this is a thing with BitLocker? I remember coming across YubiKeys being able to do this via something called PIV (Personal Identity Verification). Found this guide now after giving it a quick search: https://gist.github.com/daemonhorn/03301a66da7d1f4de6cdc8c8b...
Not sure how sound of a design it is though, didn't dig into it much at all.
Yes, it's generally sound, and is the primary means of authentication and encryption used by the US military for classified systems.