Verified answer

Definetely the first one.

Japanese people never use the second.

Born in Kyoto. 京都で生まれる

Living in Kyoto. 京都に住む

I have no idea what is the difference.

"京都に生まれる" is used in a biograghy/chronicle? or something.

I can only say "に" can mean "in/on/at" and "to," and "で" just means "in/on/at."