If I understand their website correctly, they use WebDAV as a fallback if FUSE is not installed (or not in the right version?).
As a M1 user this would make sense that you are seeing the fallback be leveraged, as FUSE is not supported on M1. So what is likely happening is that Cryptomator is creating a local service that exposes the decrypted store over WebDAV, as WebDAV is broad support…it is then mounting the WebDAV as folder/volume in Finder.
You would likely see Cryptomator show up in the list if you were to query for local services/connections via sudo /usr/sbin/lsof -nP +c 25| grep TCP. If you look at mount you will seeit exposed as something similar to https://127.0.0.1:9999/somevolume/ on /Volumes/somevolume
Depending on how you setup your sync location, DT is going to be using /Volumes/somevolume/somefolder, from this example. Perhaps if you could actually point DT directly to the WebDAV volume from Cryptomator it would work, rather than the one being mounted by Finder. I don’t use Cryptomator, so I can’t speak to if it allows connecting 3rd party apps to the Cryptomomator WebDAV server.
If you are simply trying to store a non-synchronized (but backed up) copy of the DT database on OneDrive, it seems the lighter and equivalent option would be to use an Encrypted Database though. An Encrypted Databases uses Finder’s native disk image to encrypt the data, similar to what Cryptomoator is attempting to do. This will not work to sync multiple computers. I don’t think any of these are going to solve the Sync issue, if that is your goal.
I just wanted to add that I can’t say storing a Disk Image file on OneDrive will work or not, OneDrive does really idiotic and bad things with files as it synchronizes them. You can witness this by storing a basic text format like Markdown and leaving it open in an editor, I use Typora…I get frequent “the file has been updated externally” warnings as OneDrive futzes with the actual file to do synchronization. This is likely why OneDrive is not supported, as Microsoft can’t be bothered to follow standards or even good practices as they haven’t since they existed. You are expected to adapt to the “Microsoft standard”, which is an ever moving target 
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I did see that behavior too. It is one of the reasons I stopped using OneDrive and switched back to Dropbox.
Also in my experience OneDrive does not play well with syncing Bundle/Package files, Dropbox seems to do this more reliably.
When using mainly Microsoft Office files, which I do for work, OneDrive works as expected.
There is always work to do in the Microsoft world…
… it pays my bills and as long as my employer lets me use Apple hardware I can live with it… Microsoft is very dominant in Windows productivity software, especially on the corporate level, which leaves less room for independent developers to create great applications and make a living. When I started using Apple with tools like DT (and Omnifocus) I became more productive because this software actually helps me doing the work better.
Microsoft is also very good at rebranding stuff… very annoying sometimes. 
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Of course FUSE is supported on Mac M1.
I am using it every day with Cryptomator!
The name is macFUSE.
Also there is a new userspace implemention that is supported by Cryptomator 1.7.x: FUSE-T