I've never seen it spelled "craft," with a "c." I've always seen it with a k, "kraft" or "Kraft." "Kraft paper bag" a more professional term for what people more often call a "brown paper bag." For example, someone might say "I'm brown-bagging my lunch today," meaning "I'm bringing my lunch to work in a brown paper lunch bag." To find out the origin and meaning, I did what native English speakers do: I checked a dictionary. ahdictionary.com says that it is "Short for Swedish kraftpapper : kraft, strength (from Old Swedish krapt) + papper, paper.]" In other words, it is an English loan word from Swedish. A web search through Project Gutenberg turned up a 1908 book, "The Manufacture of Paper," which says: "Kraft Paper.—The term Kraft, meaning “strength,” is applied to a remarkably strong cellulose paper prepared from spruce and other coniferous woods by the soda treatment, the special feature of the process being an incomplete digestion of the wood." It has nothing to do with "arts and crafts" or "craft projects" (making things at home, creatively and artistically, using materials like glue, paper, cardboard, beads, paint, etc.)

The term "craft" is sometimes referred to as "Kraft". Kraft paper is paper made from the "Kraft process," which is a specific type of paper making process that uses various chemicals to break down wood into cellulose. So the term "Kraft paper" is just referring to paper made by the Kraft process.

So a "Kraft paper bag" would consist of paper made from the Kraft process. While a "craft paper bag" may just mean a paper bag for purposes of crafting/art.

Craft or Kraft means that you can use it for art purposes as well.