I doubt that all of the details that went into this decision will ever emerge, but if I had to guess, I'd say that it was probably about being seen as "playing ball" with the existing system to minimize their risk from getting destroyed by regulators.
Crypto itself probably cannot be shut down short of nuking the Internet or physically detaining anybody who wants to trade it, but Coinbase's ability to function as a company can be shut down essentially on a whim with the wrong rule change that prevents them from functioning in a normal fashion. Already with Crypto, they have to step fairly carefully to avoid legal problems. A company can probably get away with 1 controversial thing, but maybe 2 things is harder to manage. In Coinbase's case, they already have 1 big controversial thing just in their business itself and maybe can't take on another big fight.
Also, as an obvious point, there's probably a lot more investor money available in the traditional finance system playing by traditional, well-understood practices.
> How is the entire idea ever going to get tested in the real world when the company best positioned to do so lacks courage?
I'm not certain about this opinion, but as a thought-experiment, I'd argue that the company best positioned to do this might be a boring, non-controversial, non-crypto company that literally nobody wants to ban: say a company making cereal or running a retail or restaurant chain.
Crypto is a loaded topic to a lot of people, so if a crypto company tried to do a crypto IPO, that might give detractors room to argue that it's some kind of scam or a step too far.
Whereas a boring non-crypto company is a lot more sympathetic and less threatening. Can you imagine if a cereal company tried to do a crypto IPO and regulators wanted to go after them and tried to argue that they're some kind of threat? It would be much easier for that kind of boring company to win that kind of fight in the court of public opinion at least.