Hello Keith, thank you for the message.

Yes BSP2 is getting notified by FF each time something is changing in bookmarks. So this is auto-syncing, and the FF bookmark list is the unique source. It can happen in some conditions (like disabling the addon for some time) that the sync is lost, hence the "Reload from FF API" button in the options page.

And yes favicon are fetched. That does not start immediately on first install in order to let FF stabilize first.
Then the option you mention increases the number of favicon succesfully fetched. I created that option and set it to false by default for people who do care about privacy and cookies.