I could not recreate this issue in Drupal 11.x-dev, and it appears fixed using CKEditor 5. As the screenshot shows, in a custom content type I added a content block using layout builder and was able to upload an image to the text field. @mmenavas helped me with this issue at Drupalcon.
@mmenavas worked with me to understand this issue at Drupalcon.
Confirmed that I'm seeing the corrected version like in the screenshots when adding content blocks, media items and taxonomy terms.
I'm at Drupalcon being helped by partyka and mmenavas to try and review this.