It's potentially misleading phrasing. "Unencrypted ext4" means that the filesystem Dropbox sees has to be actual ext4, not an encryption layer on top. There can be an encryption layer under it, and generally full-disk encryption works that way, by encrypting a block device and letting you run whatever filesystem you want on top.

"Unencrypted or decrypted ext4" might be slightly more accurate (although I guess it maybe sounds like you need to remove encryption, not that you just need to decrypt files in memory).