«I suspect it was someone in a call centre applying the rules and procedures rather than using judgement.»

I agree that seems very likely. Another factor that would add fuel to this kind of fire: A buyer's level of sophistication in dealing with perceived authority (in this case a big corporation) and pseudo-logic (attribution = counterfeit). People who normally yield to perceived authority without question--those who metaphorically always cross the street at an intersection--I think will be more likely to comply with illogical instructions. Those who routinely apply critical thinking--those who are, metaphorically, willing to j-walk through a break in the traffic--may be less comfortable obeying a command resulting from pseudo-logic, perhaps would be more likely to think through a situation for themselves and obey their own common sense.

When you put the two things together--simplistic procedure for a complex business AND a simplistically thinking, malleable person (yes, I'm making assumptions about that because I doubt that a confident, critical thinker would go along with PP's demand to destroy the instrument), neither the violin nor its seller stood much of a chance. I don't see how research by the violin seller would have found this potential hazard with PayPal.

The person being called the seller in this story is in fact a buyer of PayPal services. And that person apparently got screwed by nasty interpretation of nasty rules. If what seems to have happened DID happen, shame on PayPal for making it impossible for caveat emptor to be of any help to the consumer of their service who was selling the violin.