Does anyone know the purpose of this 2.7GB file "cryptex-system-arm64e" and if it can be safely deleted? Shown below is folder hierarchy on my Mac Mini M1 running Monterey 12.6.3.
Those are critical macOS components, so don't delete them. In general, stay out of the /Library folder completely, as those things are all part of the operating system.
Three phases of updating, download, preparation and installation, are now fully integrated. They also involve updating Cryptexes, as revealed in the log.
Minor nit: /Library (user space), yes, stay away from there unless you really know what you're doing and have a backup, but in this case, the file is in /System/Library, which is MacOS's domain. Sealed System Volume.
Want to avoid trying to do anything in there as "Bad Things"(tm) will happen when mucked with (and not simple to muck in there: disable SIP, turn off SSV, possibly requiring full wipe and re-install to make things right).
And, actually, /System is really snapshot of the sealed volume, a temp copy to run OS from, so as not to corrupt the golden copy if malware gets onto a system.
I think those files should have been deleted automatically after a successful update.
Try to restart or search for updates from System Settings and they may be deleted by the OS.