I suspect it's the "thin hypervisor", aka LCOW + hyperv isolation. https://devblogs.microsoft.com/premier-developer/running-doc...
(I work at Microsoft but have no inside knowledge on this; just speculating.)
Re:Windows gets a new terminal
by rtempaccount1 on Monday May 06, 2019 @04:15PM
(#19843340)
Just saw there's some more technical details here https://devblogs.microsoft.com/commandline/shipping-a-linux-....
Whilst it doesn't explicitly mention Virtual Machines or Hypervisors, I'd read this as making use of that kind of technology with some additional tech. for interop with Windows to the level of WSL currently.
EDIT: and here's the confirmation https://devblogs.microsoft.com/commandline/announcing-wsl-2/ it's a VM
They could either go the syscall emulation route (as in current WSL), or possibly the "thin hypervisor" route, the fact they're talking kernel versions makes me think that may be what they're planning...