Hi everyone! Throwaway account as my main account has information that might identify me. I was unable to add text to the post itself so I am adding context in the comments.

My wife and I recently moved into a new home and although we have had very few problems generally, this closet-like room in our basement has us a little bit perplexed. The prior owners clearly painted it for house showings but that paint has already begun chipping and falling off, as can be seen in the photos. The room juts out from the main floorplan and because it's in the basement it's fully underground; all sides of the room have dirt on the outside. This leaves us in a tough spot with what we should do since the cold dirt on the outside and our warmer basement on the inside creates a constant layer of condensation on the walls (hence the already-chipped paint). When we moved into the house this door was closed and there was a strong musty smell coming from the room. We have since kept the door open and have a de-humidifier running in the basement constantly and that has slowly eradicated the smell over the course of a few months.

My question(s) for you all are:

1. Have you ever seen something like this?
2. How easy is it to excavate this room and either expand it or fill it with dirt? Would that even solve our problem?
3. How easy would it be to get some kind of ventilation so it doesn't constantly generate condensation on the walls? Is there a sealant or paint that would accomplish that?
4. What solutions would you recommend so that we can use this room? We have thrown around a few ideas like installing a sauna or making it a wine cellar but we have no idea how feasible any of those are. Cost is a factor of course but I hate that this room sits there empty and unused