I personally suspect the later. That there's a kind of limiter built in to Soul Gems that prevents Magical Girls from using Grief that breaks down as part of the transition between Soul Gem and Grief Seed. My theory is that Madokami's angels were able to use Witch powers despite retaining their sanity because their Soul Gems lacked that limiter, whether through Madokami's intervention, or through the limiter burning out at the near-witchout point that Madoka collected them. I'd like to get some science in to confirm or deny this theory.
This is an experiment I'm sure Kyubey would be eager to help us with. He probably wouldn't even push too hard for it to be Madoka. I'm sure he'd cheerfully rip out Nagisa's soul while we watch.
I suspect that's on his list of things to do to try to get Sabrina to witch out, given how much we're still beating ourselves up over failing to keep Sayaka from contracting.