That'd require them to hold your Bitcoin for you, so they could just move some from one person to another. Isn't that counter to the Bitcoin philosophy?

I would go further to say that for a large portion of merchant transactions, confirmations are a non-issue. It is not trivial to pull off a double spend and no one is going to do it for a cup of coffee. The miniscule number of times that it might happen could be written off as the cost of doing business, the same way the big credit card companies quietly eat all the credit card fraud that happens.

Probably by being an authorized participant in GBTC - is the premium still negative? Wonder how long they can keep their business going that way.

But you need dollars on the other side. For this to work without PayPal hosting the BTC you need the following:

1. You send BTC to PayPal 2. PayPal sends equivalent dollars to the merchant.

But what is "equivalent"? What is the price of BTC at any given moment? It fluctuates a lot and you can't "lock-in" a price without waiting minutes (as opposed to milliseconds in other financial systems). So between the time that you sent dollars to the merchant and when you sold the coins you are exposed to risk of holding BTC.

Lightning does not help with this.

Lightning requires the bitcoin network to verify the transaction though. It's like using a personal check - until the bank clears it you're at risk.