diff --git a/src/editors/containers/TextEditor/index.jsx b/src/editors/containers/TextEditor/index.jsx
index c4b2215e93..b3368152b3 100644
--- a/src/editors/containers/TextEditor/index.jsx
+++ b/src/editors/containers/TextEditor/index.jsx
@@ -8,6 +8,7 @@ import {
 } from '@openedx/paragon';
 import { injectIntl, intlShape } from '@edx/frontend-platform/i18n';
 
+import { getConfig } from '@edx/frontend-platform';
 import { actions, selectors } from '../../data/redux';
 import { RequestKeys } from '../../data/constants/requests';
 
@@ -24,6 +25,7 @@ const TextEditor = ({
   // redux
   showRawEditor,
   blockValue,
+  blockId,
   blockFailed,
   initializeEditor,
   blockFinished,
@@ -40,6 +42,10 @@ const TextEditor = ({
     learningContextId,
   });
   const editorContent = newContent || initialContent;
+  let staticRootUrl;
+  if (isLibrary) {
+    staticRootUrl = `${getConfig().STUDIO_BASE_URL }/library_assets/blocks/${ blockId }/`;
+  }
 
   if (!refReady) { return null; }
 
@@ -65,6 +71,7 @@ const TextEditor = ({
           images,
           isLibrary,
           learningContextId,
+          staticRootUrl,
         }}
       />
     );
@@ -107,6 +114,7 @@ TextEditor.propTypes = {
   blockValue: PropTypes.shape({
     data: PropTypes.shape({ data: PropTypes.string }),
   }),
+  blockId: PropTypes.string,
   blockFailed: PropTypes.bool.isRequired,
   initializeEditor: PropTypes.func.isRequired,
   showRawEditor: PropTypes.bool.isRequired,
@@ -121,6 +129,7 @@ TextEditor.propTypes = {
 export const mapStateToProps = (state) => ({
   blockValue: selectors.app.blockValue(state),
   blockFailed: selectors.requests.isFailed(state, { requestKey: RequestKeys.fetchBlock }),
+  blockId: selectors.app.blockId(state),
   showRawEditor: selectors.app.showRawEditor(state),
   blockFinished: selectors.requests.isFinished(state, { requestKey: RequestKeys.fetchBlock }),
   learningContextId: selectors.app.learningContextId(state),
diff --git a/src/editors/containers/TextEditor/index.test.jsx b/src/editors/containers/TextEditor/index.test.jsx
index 3d6caeab8a..69752df780 100644
--- a/src/editors/containers/TextEditor/index.test.jsx
+++ b/src/editors/containers/TextEditor/index.test.jsx
@@ -59,6 +59,7 @@ jest.mock('../../data/redux', () => ({
       showRawEditor: jest.fn(state => ({ showRawEditor: state })),
       images: jest.fn(state => ({ images: state })),
       isLibrary: jest.fn(state => ({ isLibrary: state })),
+      blockId: jest.fn(state => ({ blockId: state })),
       learningContextId: jest.fn(state => ({ learningContextId: state })),
     },
     requests: {
diff --git a/src/editors/data/redux/app/reducer.js b/src/editors/data/redux/app/reducer.js
index 1951983f4a..043de8bf69 100644
--- a/src/editors/data/redux/app/reducer.js
+++ b/src/editors/data/redux/app/reducer.js
@@ -42,6 +42,7 @@ const app = createSlice({
       blockValue: payload,
       blockTitle: payload.data.display_name,
     }),
+    setBlockId: (state, { payload }) => ({ ...state, blockId: payload }),
     setStudioView: (state, { payload }) => ({ ...state, studioView: payload }),
     setBlockContent: (state, { payload }) => ({ ...state, blockContent: payload }),
     setBlockTitle: (state, { payload }) => ({ ...state, blockTitle: payload }),
diff --git a/src/editors/data/redux/app/reducer.test.js b/src/editors/data/redux/app/reducer.test.js
index c125185d88..67f613ab76 100644
--- a/src/editors/data/redux/app/reducer.test.js
+++ b/src/editors/data/redux/app/reducer.test.js
@@ -45,6 +45,7 @@ describe('app reducer', () => {
       ['setUnitUrl', 'unitUrl'],
       ['setStudioView', 'studioView'],
       ['setBlockContent', 'blockContent'],
+      ['setBlockId', 'blockId'],
       ['setBlockTitle', 'blockTitle'],
       ['setSaveResponse', 'saveResponse'],
       ['setVideos', 'videos'],
diff --git a/src/editors/sharedComponents/TinyMceWidget/__snapshots__/index.test.jsx.snap b/src/editors/sharedComponents/TinyMceWidget/__snapshots__/index.test.jsx.snap
index a0bf40260a..01e328f8cc 100644
--- a/src/editors/sharedComponents/TinyMceWidget/__snapshots__/index.test.jsx.snap
+++ b/src/editors/sharedComponents/TinyMceWidget/__snapshots__/index.test.jsx.snap
@@ -44,6 +44,7 @@ exports[`TinyMceWidget snapshots ImageUploadModal is not rendered 1`] = `
         "selection": "hooks.selectedImage.selection",
         "setEditorRef": undefined,
         "setSelection": [MockFunction hooks.selectedImage.setSelection],
+        "staticRootUrl": undefined,
         "studioEndpointUrl": "sOmEoThERvaLue.cOm",
         "updateContent": [Function],
       }
@@ -112,6 +113,7 @@ exports[`TinyMceWidget snapshots SourcecodeModal is not rendered 1`] = `
         "selection": "hooks.selectedImage.selection",
         "setEditorRef": undefined,
         "setSelection": [MockFunction hooks.selectedImage.setSelection],
+        "staticRootUrl": undefined,
         "studioEndpointUrl": "sOmEoThERvaLue.cOm",
         "updateContent": [Function],
       }
@@ -191,6 +193,7 @@ exports[`TinyMceWidget snapshots renders as expected with default behavior 1`] =
         "selection": "hooks.selectedImage.selection",
         "setEditorRef": undefined,
         "setSelection": [MockFunction hooks.selectedImage.setSelection],
+        "staticRootUrl": undefined,
         "studioEndpointUrl": "sOmEoThERvaLue.cOm",
         "updateContent": [Function],
       }
diff --git a/src/editors/sharedComponents/TinyMceWidget/hooks.js b/src/editors/sharedComponents/TinyMceWidget/hooks.js
index 6fe5b313e5..9f959f1638 100644
--- a/src/editors/sharedComponents/TinyMceWidget/hooks.js
+++ b/src/editors/sharedComponents/TinyMceWidget/hooks.js
@@ -84,20 +84,6 @@ export const replaceStaticWithAsset = ({
   editorType,
   lmsEndpointUrl,
 }) => {
-  if (isLibraryKey(learningContextId)) {
-    // This function doesn't currently know how to deal with Library assets.
-    // Libraries don't mangle the path into an asset key–it might be sufficient
-    // to remove the initial "/" in a "/static/images/foo.png" link, and then
-    // set the base URL to the correct ComponentVersion base. If we let this
-    // function try to deal with Library assets, it would convert them in such a
-    // way that it wouldn't convert back later on, and we'd end up storing the
-    // incorrect OLX and breaking the display from that point forward.
-    //
-    // So until we handle it better, just disable static asset URL substitutions
-    // when dealing with Library content.
-    return false;
-  }
-
   let content = initialContent;
   let hasChanges = false;
   const srcs = content.split(/(src="|src="|href="|href=&quot)/g).filter(
@@ -116,7 +102,15 @@ export const replaceStaticWithAsset = ({
 
       // assets in expandable text areas do not support relative urls so all assets must have the lms
       // endpoint prepended to the relative url
-      if (editorType === 'expandable') {
+      if (isLibraryKey(learningContextId)) {
+        // We are removing the initial "/" in a "/static/foo.png" link, and then
+        // set the base URL to an endpoint serving the draft version of an asset by
+        // its path.
+        /* istanbul ignore next */
+        if (isStatic) {
+          staticFullUrl = assetSrc.substring(1);
+        }
+      } else if (editorType === 'expandable') {
         if (isCorrectAssetFormat) {
           staticFullUrl = `${lmsEndpointUrl}${assetSrc}`;
         } else {
@@ -261,9 +255,12 @@ export const editorConfig = ({
   content,
   minHeight,
   learningContextId,
+  staticRootUrl,
 }) => {
   const lmsEndpointUrl = getConfig().LMS_BASE_URL;
   const studioEndpointUrl = getConfig().STUDIO_BASE_URL;
+
+  const baseURL = staticRootUrl || lmsEndpointUrl;
   const {
     toolbar,
     config,
@@ -290,7 +287,7 @@ export const editorConfig = ({
       min_height: minHeight,
       contextmenu: 'link table',
       directionality: isLocaleRtl ? 'rtl' : 'ltr',
-      document_base_url: lmsEndpointUrl,
+      document_base_url: baseURL,
       imagetools_cors_hosts: [removeProtocolFromUrl(lmsEndpointUrl), removeProtocolFromUrl(studioEndpointUrl)],
       imagetools_toolbar: imageToolbar,
       formats: { label: { inline: 'label' } },
@@ -436,6 +433,17 @@ export const setAssetToStaticUrl = ({ editorValue, lmsEndpointUrl }) => {
     const updatedContent = content.replace(currentSrc, portableUrl);
     content = updatedContent;
   });
+
+  /* istanbul ignore next */
+  assetSrcs.filter(src => src.startsWith('static/')).forEach(src => {
+    // Before storing assets we make sure that library static assets points again to
+    // `/static/dummy.jpg` instead of using the relative url `static/dummy.jpg`
+    const nameFromEditorSrc = parseAssetName(src);
+    const portableUrl = `/${ nameFromEditorSrc}`;
+    const currentSrc = src.substring(0, src.search(/("|")/));
+    const updatedContent = content.replace(currentSrc, portableUrl);
+    content = updatedContent;
+  });
   return content;
 };
 
diff --git a/src/editors/sharedComponents/TinyMceWidget/index.jsx b/src/editors/sharedComponents/TinyMceWidget/index.jsx
index b311e863a0..9294cf0bda 100644
--- a/src/editors/sharedComponents/TinyMceWidget/index.jsx
+++ b/src/editors/sharedComponents/TinyMceWidget/index.jsx
@@ -44,6 +44,7 @@ const TinyMceWidget = ({
   images,
   isLibrary,
   onChange,
+  staticRootUrl,
   ...editorConfig
 }) => {
   const { isImgOpen, openImgModal, closeImgModal } = hooks.imgModalToggle();
@@ -85,6 +86,7 @@ const TinyMceWidget = ({
             learningContextId,
             images: imagesRef,
             editorContentHtml,
+            staticRootUrl,
             ...imageSelection,
             ...editorConfig,
           })