You may be thinking in this way paypal will not detect transactions are for bitcoin purchase. But at some point paypal will start to review again all of your transaction and also how those points are being used, than they may froze your merchant account and also of your clients accounts.
I guess that he is doing this only to try and proven chargebacks. At least I suspect so. I don't know how successful this would be. Paypal customer service will have the last say, like in all cases.
About the ToS, maybe they are looking on the other side if you are not buying directly Bitcoin. Just like they do with Virwox. Again, I am just guessing. OP might choose to clarify this a bit further.
