There is no linguistic reason to think that nailed "could" or "should" mean bound in the article "On Demonology and Witchcraft in Ceylon" that appears in The Journal of the Ceylon Branch of the Royal Asiatic Society of Great Britain & Ireland: Volumes 3-4, published in the late 19th century by the Royal Asiatic Society of Great Britain and Ireland, Ceylon Branch, Colombo.
Doubt regarding whether the event is factual is another question. But keep in mind that nails do not have to be made out of iron; there are wooden nails. So there's no reason, linguistically to think that nailed means something other than nailed.
The example just before this one speaks of another child thought to be a demon, and his fate was that "An hour or two after its birth the grandfather dashed out its brains with a stick." I doubt that was common in "Ceylon" either, except in the case of so-called demon babies.