I wanted to reply to share my experience, I am not an IT guy so maybe somebody else can read between the lines and say what actually was going on.
I had the same issue, I have 2 Apple Watches, a 5 and a 7 and neither of them would unlock my MacBook Air. Either nothing would happen or I would get the too weak message. Also some apps that "approve on watch" like opening passwords in preferences would also not work.
I have also been experiencing spotty WiFi with the MacBook Air dropping internet and other devices in the house dropping the internet connection.
I ran Pingplotter sidekick on the Mac and it reported that my bandwidth was being saturated at hop 1, by this Mac!
After trying everything Google had to offer and multiple discussions with my ISP, I decided to reset the Mac to out of the box and start again. I started the process and I got a Warning that iCloud was still uploading files and I would lose those files if I continued. This is strange to me as I do not have many or large files on iCloud. I backed out of the reset and tried again 3 hours later only to get the same message.
This time I hit continue and reset the Mac.
Since doing this, for 3 weeks now our internet has been 100% stable with no drop offs, speed on my Mac is double what it was at 560Mbps and both watches work flawlessly unlocking the Mac and now let me approve things on the Mac with the watch.
Sorry I can't say specifically what the root cause was, but it seemed like the Mac was stuck uploading something that never completed and sucked up all the WiFi trying.