While you can certainly develop your projects locally using VSCode (or any other editor), in order to submit the project it will need to be live online. You can use CodePen for this or a similar service. The CDN link is how you can include the test suite in your project. If you fork the CodePen starter, it will already be there, but if you don’t fork from CodePen then you will need to include it manually
There are other sites like CodeSandbox which will let you upload images.
You can also host the project on something like Surge, Netlify, GitHub Pages and so on. Which will let you use the local images (as long as you link correctly using relative paths).