Well, Mark posted another update. He couldn't get into specifics, but this does raise hope that the public outcry had its effect:
PayPal update: I met with PayPal this afternoon at their office in San Jose. They will soon announce revised content policies that I expect will please the Smashwords community. Effective immediately, we are returning our Terms of Service to back to its pre-February 24 state. Beyond that, our friends at PayPal have asked me to hold off sharing additional details until they've had a chance to finalize their new policies. Thank you for your patience and support during this crazy last few weeks.
So it looks like my post of last Sunday was a tad premature; it took longer than I expected to accomplish our goal.
But I wouldn't get too settled just yet; Paypal hasn't stated the new policy yet so we don't know what the real outcome will be.
Update: Paypal has clarified the new policy on their blog. (Boy did they back down.) Their new policy only affects potentially illegal images, and the blog post specifically states that it doesn't cover text only ebooks.
First and foremost, we are going to focus this policy only on e-books that contain potentially illegal images, not e-books that are limited to just text. The policy will prohibit use of PayPal for the sale of e-books that contain child pornography, or e-books with text and obscene images of rape, bestiality or incest (as defined by the U.S. legal standard for obscenity: material that appeals to the prurient interest, depicts sexual conduct in a patently offensive way, and lacks serious literary, artistic, political or scientific value).
In addition, the policy will be focused on individual books, not on entire “classes” of books. Instead of demanding that e-book publishers remove all books in a category, we will provide notice to the seller of the specific e-books, if any, that we believe violate our policy. We are working with e-book publishers on a process that will provide any affected site operator or author the opportunity to respond to and challenge a notice that an e-book violates the policy.
This is a major change from the original policy, which was tantamount to censorship. But it's still a shame that they're trying to pass judgement on which ebooks have "serious literary, artistic, political or scientific value".
Is anyone planning to reopen their Paypal account? If not, do you have an alternative to recommend?