Failed to authenticate decrypted block - bad password?

Given that using these options this way is not logical I was considering it myself as a possibility but:

So I assume content is encrypted if it has crypt headers.

I have replicated exactly the same setup with gdrive, crypt and server_side_across_configs = true. All works perfectly fine. I can encrypt and decrypt files no issue. Of course there is always possibility that in some special cases (retry on throttle maybe) this flag interferers - but I can not reproduce it.

Now unfortunately as it is impossible to test original setup it is all in realm of speculations. Could be anything really. Interestingly there are few more similar topics on the forum - always about google drive. None was concluded definitely, e.g.: