Although PayPal pretends your deposits are protected by "flow-through" FDIC insurance, they have refused any attempts to be classified as a bank that would be subject to FDIC requirements. Instead, they argue that the pool of money they keep in real banks under the PayPal name protect you, the user, in the event of . . . well, they don't actually say which event. They talk instead in generic terms.

So look at the two events where you would need protection: PayPal goes bankrupt, or the bank goes bankrupt. If PayPal goes belly-up, you will not be protected because PayPal would likely drain its bank balances to meet payroll, etc., before filing for bankruptcy. If the bank itself goes belly-up, the FDIC insurance for that bank would only protect PayPal - as the named depositor - since your user name is not on the account.

Since learning of the lack of FDIC protection for PayPal's customers, my recommendation has been to keep only minimal balances at PayPal. But also remember: your user agreement allows PayPal to reach into your own designated bank account to take money away if PayPal needs it for appropriate purposes (such as refunds to buyers). You have very little protection if you keep large sums at PayPal or at a designated bank account.