Has more to do with the quality of the headphone output stage. The m10 is ok and I've certainly heard worse, but it's no better than your average iPod/mp3 player.
Ive never tried to listen to mp3s not recorded directly by the m10 and not sure how it would work, if at all. You will certainly miss the general features a dedicated mp3 player provides (I.e. Music libraries, shuffle, playlists, etc.)
An interesting idea. I'm sure the decoded audio is the same.