Are you sure this policy pertains to all knives, or just certain types of knives? (ones that are restricted in the buyer's or seller's jurisdiction) I just looked on their site for information and found this:
"What types of weapons and knives does PayPal prohibit?
PayPal prohibits transactions for certain hand weapons or knives that may be illegal or restricted in some jurisdictions.
Weapons – PayPal generally prohibits transactions for these types of weapons:
For other hand weapons, sellers must ensure the weapon is lawful in both the buyer's and seller's jurisdiction before completing the sale.
- Nunchaku.
- Brass or other metal knuckles.
- Leaded canes, staffs, crutches or sticks.
- Zip guns, shurikens or throwing stars.
- Hand grenades or metal replica hand grenades.
- Billyclubs or batons, sandclubs, sandbags or slungshots (also known as saps or blackjacks).
Knives – PayPal generally prohibits transactions for switchblade knives and disguised knives. A switchblade is any knife resembling a pocketknife with a blade that can be released automatically or by use of a trigger. Other names for switchblades include spring-blade knives, snap-blade knives, gravity knives and butterfly knives.
A disguised knife is a knife designed to look like a harmless item. Examples of disguised knives include belt buckle knives, cane swords, shobi-zue, lipstick case knives, air gauge knives and writing pen knives.
Other Related Items – PayPal prohibits transactions for destructive devices and the sale of military equipment or supplies that violate laws or regulations in the buyer's or seller's jurisdiction."
There are a number of things that Paypal prohibits, but there is no mention of items that are allowed to be sold, but buyer/seller protections are nullified.
It all depends on how one interpets that first part,
“may illegal in some jurisdiction.” If that means “this knife is illegal in NYC therefore it is illegal in SOME (a) jurisdiction therefore it is not covered,” then that could be one way of interpreting what they are saying.