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Fcp can’t work with files in the cloud as it states. I don’t know why you can’t use external drives? So each time you will have to download 200 - 600 gigs? This will take some time … An external drive of 6TB+ is not expensive and it could be cheaper then the time you spend downloading and uploading files. You said the files were stored locally, but iCloud folder is not locally. Good luck
 
You're kinda stuck.

With external drives banned, you may be limited to replacing the internal 1 Tb drive with a larger ~2 Tb drive. That way you can make a "working copy" of the libraries in a separate location after downloading to your OneDrive folder.

You might be able to squeeze by by moving the downloaded files out of the OneDrive folder to another location in small batches if the individual files aren't too large.
 
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