No, PayPal doesn't hold non-eBay funds because of eBay account restrictions. I still use PayPal for Etsy and my website and haven't had any problems. However, I have taken a couple of measures to ensure that any potential problems with PayPal won't have an affect on my finances.
1) I have a dedicated PayPal savings account, not checking. It's an online savings account with ING that any funds over $20 are instantly transferred into. This is the only bank account PayPal has access to. Because it is a savings, PayPal can not withdraw it into a negative balance. Once the money arrives into that savings account, it's immediatly transferred into a different one that PayPal doesn't have access to.
2) I also have a dedicated PayPal credit card. It's easy for charges to appear on a regular credit card statement and be overlooked. Because I have a credit card that is dedicated to PayPal, they can't slip anything through without notice. I also make all PayPal payments with the credit card and not the PayPal balance. This gives me an extra layer of protection against unauthorized charges as they can disputed with the credit card company.
I keep getting those stupid "your restrictions will be removed when your account is reviewed on the 20th of next month" messages too. Don't believe them! Once you hit the three low star ratings in a 12 month period, you're in deep muck. The way I see it, it will take 12 months for the restrictions to be removed because those three low ratings will be there for that long. Like many others here, I'm done with them. It's just not worth the hassel.
As for the Etsy stuff, I sell my handmade goods there and could list G1's if I wanted. The G4's get listed here and my website.
Medleysong, Yipes that's a lot of money! Congrats on being able to sell that much =) And good luck on selling the rest here!