The virtual drive is not created on C because ist virtual.
I assume you mean the vault (the encrypted files).
You can store your vault wherever you want. Just choose the desired location during the vault creation process, or move the vault to your desired location. Yes, this can also be an external HD
Please notice. If your vault is not on C, but shows the capacity of C, then you are facing this issue
To avoid this, please go to your settings and change the volume type to something other than WebDAV.