We ran into something similar to this when we updated our boot image. When you plug in the USB thumb drive to boot into SCCM, it will check with the copy on the source and if its different. It will download and cache the boot image and run it locally. The issue is when you have an encrypted drive. When you navigate to an encrypted drive, there wont be any space available until you diskpart it. So when it tries to copy the boot image, it will not have enough space and fail. Not sure if you have the same issue since you PXE boot.