I'm experiencing the same problem. I tried this (selecting the image through the Design Studio), and was able to hit the swap button, but the alt text and link fields were still grayed out. Then when I double-click the image again to edit those fields, it has reverted back to the "External URL" option.
Plot twist: I uploaded the image in question to our company server versus the Design Studio, and now it is working just fine. Any ideas what's happening here? Do we need to change something in our Design Studio? This is the first time this has happened in 2.5 years.
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