In what was does violating the terms of service of the platform mean that the platform gets to keep the money but not return the goods? You don't get to keep someone's money just because you decided so. That's theft.

I'm not a lawyer, but I think there are probably fairly clear laws on exactly what you can and can't do an an intermediary of payment. I doubt "we decided to deliver your goods but keep your money" is one of the things they are allowed to do, at least for longer than a very well defined period of time. I imagine suspected fraud might supersede this to some degree and have its own rules, but that's what I was pointing out, this isn't a case of suspected fraud, it's a TOS violation, and since Etsy has more insight than paypal into the situation as the marketplace and should know this, treating it like fraud when it's not might be something that could land them in trouble(?).