It killed itself. I stopped using several services because they want me to send fucking passport info to make a $10 transaction, so unsafe.
If you are wondering why Paypal never asked for your passport, it's probably because you eventually linked Paypal to another KYC-compatible entity, such as your bank (by linking your bank, sending money with your credit card, etc).
I assume in the case of bitpay you would only link your btc wallet which in itself doesn't offer KYC verifications.
Lots of other services continue to function with no such requirements. Bitpay only did it recently after many years of business and there was no regulatory change
I also don't understand how it is logically any different from the merchant accepting btc themselves and choosing to do the conversion themselves
There are many cases where businesses go beyond the legal requirements for whatever reason. Coinbase for example has explained that they make shady backdoor deals with regulators.