I'm not sure it's entirely unreasonable on Coinbase's part to disallow margin trading if the margined securities are required to be delivered to the customer's wallet, and not just noted in their account. TD Ameritrade certainly doesn't let you transfer long stock bought on margin off the site - and for good reason! If the market moves against you, TD needs the assurance that they can liquidate your collateral (the stock bought on margin) before your total account value drops below zero - they give you some warning (a margin call) to deposit more funds, if you fall too low in balance, they'll automatically liquidate you. It seems like Coinbase was doing basically the same thing, allowing you to buy on their books but not take the securities off site. The SEC basically says that Coinbase can do that, but then they need to follow the regulations just like stock brokers. If they want to offer margin and not have to comply with regs, then they needed to deliver to their customers (which would allow customers to avoid liquidation / margin calls). So while Coinbase might be being a little disingenuous here, it's more about avoiding regulation than about "actually paying out".
Sorry, CFTC, not SEC. Here's the actual rule.[1] This refers to "delivery" when the futures contract is closed out, not while it is pending.
This follows the procedure for physical commodities, like grain. A key point there is that the organization storing the grain is totally separate from the trading process. What you're trading is a warehouse receipt for grain in a grain elevator somewhere. You can "take delivery" by getting the warehouse receipt and starting to pay storage charges. At that point your broker no longer has access to the asset. Eventually someone buys it who actually intends to use it, and they have it loaded onto a train or truck.
The key point here is separation between the broker, exchange, and storage facility. Cryptocurrencies use cryptographic wallets instead of warehouses, so "delivery" means delivery to the user's wallet.
