You're misunderstanding the feature. Coinbase has supported off-Blockchain transactions for a while now, and it does not require a USD wallet; it can be done with any transaction internal to coinbase.

Instant exchange let's you send bitcoin from your USD wallet, meaning you don't have to hold bitcoin to use it, because your local currency is "instantly exchanged" into bitcoin when you send it.

It has nothing to do with on/off Blockchain transactions.