I never tried Smart Device method, but after a quick look at the FAQ it looks like Smart device connects to a running Calibre via WiFi and downloads the selected books (like an eInk reader).
That’s why all your books are in the “all downloaded books” folder and you don’t see anything else if not connected - you have downloaded the books only!
So CS did nothing wrong, only as stated.
You need to select a new library via "select from device storage" and copy the Calibre library folder accordingly. I have never tried this either and don't know how CS deals with the fact that the ePubs are physically located in internal storage.
If I were you, I would try it all out with a very small test library
Edit:
According to
https://calibresync.bitbucket.io/int...s/#usb-storage internal storage shouldn’t be a problem