Grinding sound when in park or neutral only
 

A few days ago, my 1998 626 began making a grinding noise when in park or neutral only. It shifts into gear just fine and doesn't make any noise when in drive or reverse. The parking brake light also came on, which was strange because the e-brake was not engaged at the time.
When I had it in park for a while and was trying to pinpoint where exactly the noise was coming from I began to notice smoke coming from the steering column - obviously alarming. So I shut the car off.

I went to go check it out again this morning to do some more trouble shooting and noticed that the car started without turning the key all the way. I hadn't ever noticed this before.

I've been trying to do some research to get to the bottom of this and the closest thing I found was that the key cylinder needs to be replaced. Does anyone have any insight into this? Does it sound like it's the key cylinder or something else.

Thank you!