I'm not an expert on SCD tech stuff, but here's what I know:
There is a BIOS ROM in the Sega CD. When the Sega CD is connected and no cartridge is inserted, the Genesis/MD runs the BIOS like a cartridge program. It does some initialization and then decompresses the SCD BIOS into SCD RAM (the SCD has its own CPU, so it needs something to run also). The license protection isn't actually that different from Saturn and Dreamcast - the program that displays the "Produced by or under license from Sega Enterprises Ltd." is on the disc, and the SCD BIOS will not run the game unless that code matches a copy stored in the BIOS. The difference with SCD is that this program is different for each region, and they are not all the same length. That's why scdconv doesn't work with all games - some (particularly Japanese games, for which the code is *much* shorter than PAL or US games) don't have enough room for the longer code. SCDConv tries to compensate for this by relocating code, but only so much can be done to analyze and modify unknown code automatically, so it doesn't always work.