Thank you for the excellent clarification for how it should work. My iPad is also 4th Gen with iPad iOS 14.1 Unfortunately however when I touch the grey area with my finger, or click it with my iPad trackpad pointer, no menu is displayed. I can use a similar procedure in the Apple Notes app for selecting either the magic or on-screen keyboard which always works so I cannot understand why it doesn’t in the Cloud app!
BTW are you clicking the grey area with your finger as I suspect that you may be using an Apple Pencil 2? I am asking as I only have an Apple Pencil 1 and was playing around with my old iPad Pro1st Gen, without a separate keyboard, and that menu appeared! However, if I touch the grey area with my finger it doesn’t.! In fact I had never seen that menu before so was surprised when it popped up.
Ps. Sorry for the late reply but I kept getting the message that the “ Message Boards is temporarily unavailable.”, not sure why the plural “Boards” as I could see that posts were appearing on other boards! I must be having a bad day!