Put a .txt file on your USB thumb drive. Open it in Notepad. Does the window showing you editing the file disappear when you yank the thumb drive out of the USB port? No. Why? Because the program loads a copy of the file that it is editing. That's how file handle and buffers work. That's how most application edit files. When you want to save (on exit) the file that you are editing, you'll have to save somewhere else or reinsert the thumb drive into the USB port. If a program directly edited a file on the drive, it would run afoul of the file system unless the product used its own installable file system. Directly manipulating the contents of sectors on a drive is what the OS is supposed to do through the file system.
As to whether the copy of the file in memory is encrypted or not is something you might try to figure out with memory probe software (i.e., scans memory). If not encrypted, pieces of the file could be in the pagefile although at 4K chunks only and it takes forensic software to dig it out and put back together, but it can be done. I doubt the memory copy is encrypted. Probably just the static file copy is encrypted.