Don't do forced hardware reset until you get a recovery key some how. After doing a forced hardware reset, the reset protection will still be active. The reset protection will force you to either log into your Microsoft Account to turn off the reset protection (which won't work and give you the same error as before) or to enter a recovery key which you can get from your Microsoft account (this method works).

Two days ago, one of my family members Lumia 640 that he was using was acting up and needed to be reset. I tried the normal way to do a factory reset like you and the phone gave me the same error. I did a forced hardware reset using some button combinations and it did reset the phone; however, afterwards the phone still required you to log in to your Microsoft account to turn off the reset protection to continue setting up. Well logging in doesn't do anything and gives you an error.

When I logged into my Microsoft Account on my computer to get my recovery key, it took me several tries to get the key. The site gave me an error several times until finally it gave me the key to remove the reset protection.