Would Paypal be able to freeze your account and your bitcoins? I've heard some horror stories about people when keeping large values in paypal.
Definitely would bring it more to the masses for sure though.
Of coarse they would be able too.
Unless you and only you know your private key your bitcoins are not yours.
What PayPal could do is have you put your
BTC address or master public key in there that you generated offline, then when you complete checkout, give you an unsigned TX with your inputs which you would then sign on your own computer (or with some signing device) and give that back to PayPal. PayPal would never control your private keys, only know your addresses to facilitate you getting paid with only your registered email address(es).