I think there are a few key points that highlight why offsetting risk is not a valid justification for this behavior:

-A 30% default rate is absurdly high. There is no way 30% of the cards being used over the phone are stolen.

-Even if usage of the service stops, the Rolling Reserves are a permanent change to they way PayPal handles his account. He cannot turn this off, even if his risk profile goes to 0.

-PayPal is not even authorized to act as a bank in the state he lives and operates in.