As someone who deals with a lot of online gamblers, especially those new to online casinos, one of the first things that get asked is about Paypal, and the ability to use Paypal to make deposits as well as collect winnings. The answer is confusing we used to, we can´t currently, but things are starting to look more promising and we should be able to use Paypal with online casinos again soon.
In 2006, the US Congress passed the Unlawful Internet Gambling Enforcement Act. (UIGEA) which made it illegal for US banks and payment processors to transfer money back and forth between gamblers and online casinos. In an ironic and probably planned twist, credit cards were for the most part excluded from this law.
The law itself is vague about some things and has allowed many smaller payment processors to risk it. So even know if you visit any online casino, more than likely you will see a handful of companies with similar business models as Paypal available for use.
The main reason Paypal never took the plunge to test the waters was that their size and popularity and most importantly because they functioned as a subsidiary of eBay.
Paypal dwarfs their competition, and so while the smaller payment processors were able to sneak under the radar, a company as big as Paypal would get noticed and would probably draw some attention from the congressman who wrote the law, and the FBI. The past few CEOs of eBay probably felt that it was just not worth the risk as Paypal is a very profitable business already. Smaller online payment processors are less successful, so more likely to take risks.
When Paypal split from eBay last year and become its own independent company, it also came with a more aggressive CEO and Board of Directors and Paypal seems to be trying to find ways to avoid UIGEA. The other reason is the success of Daily Fantasy Sports at allowing online gambling and avoiding problems with the government. Daily Fantasy Sports companies are getting huge, use Paypal, and have skirted UIGEA laws successfully. Because of their huge popularity, it seems unlikely that the federal government is going to be able to successfully litigate against them, which could cause some trickle-down gutting of UIGEA, which is already a law that is difficult to prosecute.
With all of these things changing in the last year or two. Paypal has taken the plunge, well not really a plunge, but more like sticking in a foot and has begun working with a few online casinos. With a recent election, it was probable that Paypal was waiting to see the results of the election, and how that will affect the enforcement of UIGEA before working with smaller and more globally located online casinos.