According to what I have been told by MHdt labs, the switch on the back chooses between Optical and Coax. However, if the DAC detects the +5v signal of the USB, it runs off the USB signal until you either disconnect the cable or shut it off from the computer where it defaults to whatever is selected by the switch. They are also going to make a Paradisea V2 without USB, and that will have two switches I belive, one for Toslink optical / SPDIF, and the other for Coax / BNC (both SPDIF).
I have no interest in USB. Do you know when the V2 will be available? A model with "first come first served" switching for all inputs like the Great March 2 would be nice also - but I guess you can't have everything.