I seem to have fixed all of the Continuity issues in my setup, including unlock with Apple Watch. Mind you, my Watch is the only device I have not updated yet. It's still on 9.3.1 watchOS, though I don't think it matters because I was experiencing the same inability to unlock the Mac as others are here.
All I did to "fix" the issue here was:
- changed/updated my iCloud account password
- toggles various Continuity things off and on again, e.g. the Unlock with Apple Watch feature, Handoff, settings for Universal Control, etc.
- and of course rebooted once or twice.
In the end I'm able to use Continuity features across all my devices (iPhone, iPad, Mac Studio, M2 MBA), including unlocking both of those Macs with the Watch, Handoff, AirDrop, Universal Control and Continuity Camera.
I opted for just changing my iCloud password instead of logging in and out of iCloud because it's simply easier. The effect is essentially the same in the sense that iCloud account data in the bowels of macOS is probably updated / re-initialized. Logging out and back into iCloud would've needed to be done on all devices and would have the side-effect of removing iCloud data from the device (e.g. Photos libraries), only to re-download that junk again when logging back into iCloud. Nah... rather not. Changing the iCloud password on one device doesn't require logging back into that account on the other devices, with the exception that you might get bumped out of FaceTime and Messages (on the Macs) and have to log back into those.
We'll see if this holds. I've rebooted several times on all devices and it seems to be holding.