Currently RoundCube is using SMTP user/pass authentication but failing to send 
emails with "SMTP Error (535): Authentication failed."

This is likely because SendGrid has only started to accept connections via API 
Keys

Does RoundCube support this authentication via API and how do I apply this?

Path: /var/www/html/roundcubemail_backup/roundcubemail/config/config.inc.php

$config['smtp_user'] = " "
$config['smtp_pass'] = " "
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