Even before the release of Monterey 12.3, Dropbox warned its users that the macOS app would lose some features due to recent changes to Apple’s operating system. Some of these will be fixed when the company releases an update to make the app compatible with the new macOS API for Cloud Platforms. But not all.
Dropbox does not allow you to store your folder on an external drive. This is because all content of cloud apps on macOS will now be moved to ~/Library/CloudStorage for privacy reasons. A company representative confirmed that nothing can be done about it as it is a limitation of macOS.
Source: Ferra

I am a professional journalist and content creator with extensive experience writing for news websites. I currently work as an author at Gadget Onus, where I specialize in covering hot news topics. My written pieces have been published on some of the biggest media outlets around the world, including The Guardian and BBC News.