What PayPal is offering is not even close to what BitPay is doing. On PayPal you will only be able to use cryptocurrency that you bought from PayPal, you cannot transfer cryptocurrency in or out of your account. All you can do is buy cryptocurrency from PayPal and then sell it back to them at a later time.
I never used bitpay but I don't think it's their fault to have to request passport verification. As a money transmitter they are required to answer to KYC rules, which includes passport or other docs verification to ensure you are who you are.
If you are wondering why Paypal never asked for your passport, it's probably because you eventually linked Paypal to another KYC-compatible entity, such as your bank (by linking your bank, sending money with your credit card, etc).
I assume in the case of bitpay you would only link your btc wallet which in itself doesn't offer KYC verifications.
Lots of other services continue to function with no such requirements. Bitpay only did it recently after many years of business and there was no regulatory change
I also don't understand how it is logically any different from the merchant accepting btc themselves and choosing to do the conversion themselves
There are many cases where businesses go beyond the legal requirements for whatever reason. Coinbase for example has explained that they make shady backdoor deals with regulators.
