PayPal has FDIC insurance on your cash balance, even though FDIC does not think they are a bank. They merged with X.COM a couple years ago. X.COM was a real bank, so the money must be held there. New York banking regulators have aleady ruled that PayPal is not operating an illegal bank. The dangers of being a new format I guess. See this article:
http://story.news.yahoo.com/news?tmpl=story&u=/nf/20020613/bs_nf/18211