I wrote about it here: http://www.sitepoint.com/blogs/2008/10/09/open-source-fundin...
I'm sure there are a lot of project owners from microPledge looking for a new home, but using PayPal might just lead your down the same path.
It's good to see this getting such attention here, because it's something we discussed at some length internally as a potentially really big problem, and it validates that we're spending time talking about the right things.
As soon as they catch a whiff of that, they'll shut your account down, and lock your money in for 6 months.
It's not very pleasant, to put it mildly, and if I were you I'd switch to AlertPay or some other provider ASAP. Sorry to be negative about this ... but I'm commenting so you hopefully don't have to go through what we at microPledge did. :-)
(Edit: Oh, just curious, how much did you know about microPledge before you launched? I wouldn't be surprised either way, and certainly good on you for trying ... but your descriptions of the site on Bitloot sound awfully familiar. :-)