I’m wondering if this leaves a slim gap where someone wishing to duplicate a game can install it for Person A, then take that person’s Xbox offline, then give it to Person B to use online thereafter. Both people get the game for free.

Granted, that’s a hazy workaround and pirates will probably have easier methods. Maybe they talked with license holders and accepted it as a tiny potential loss; or, more likely, they’re forcing everyone online to enable this.