My own approach is to put the API key in the MCP server, apply principle of least privilege there, and firewall access to MCP with agents being on same private network with Tailscale.

Not only giving an API key to an agent can leak to the model because of harness issues or too broad reading rights, but also most providers don't give the ability to apply principle of least privilege to an API key.

I don't want to give an agent full R/W access to any of my services/accounts.

The agent doesn't, the harness does. It's separate from a normal conversation / agent runtime environment. How do you suspect auth keys can leak from an MCP that's been added to chatgpt.com?

With a different key, obviously. This lets you keep the MCP server firewalled to your local network only while still allowing home assistant itself to access the internet

You give it a key of course! And if that doesn’t fit your security model and threat vectors, simply give the key to another MCP.