As with many of these things recently, it's a cluster fuck because we're not dealing with a single entity, but a whole incestuous web of interlocking financial institutions, each with their own perverse and opaque incentives. I will say from experience that as individuals, NSFW artists have historically had to be very careful when say taking commissions through paypal, that their commissioners didn't accidentally mention the nature of what they were paying for. On the other hand though, often these cases were mis-represented, and the real issue ended up being that the artists were further abusing the system by for example trying to use "friends and family" to dodge fees (which will get you shitcanned REAL fast on Paypal). I don't mean to attack the person or people effected by this, but a lot of times there's more going on with these things than is at first clear.
Regardless, Paypal has serviced Itch for some time. They MUST be aware of what's happened recently, given the stir it caused, and yet they have not withdrawn service or asked for further censorship. I don't know how else to interpret that, other than that Paypal is (tacitly, for the moment) fine with its customers buying what Itch is selling. ALL the things it is selling.
There is just no way that "kill people's accounts if they buy NSFW on Itch" is policy. If it was, there would be an absolute FLOOD of people complaining, RIGHT NOW, rather than a scattering of reports here and there. I'm sorry about your account, but I would bet money its death was due to some other bizarre freakout on Paypal's part, rather than anything Itch related. For the sake of collecting info and hopefully further understanding this though, are you in the US, or elsewhere?
Viewing post in No, using Paypal on Itch will not "Nuke" your account comments
Interesting. This does seem to be a common thread (the partial Paypal withdrawal from Steam was for a bank/banks handling more "obscure" currencies), and a bizarre one, as I would expect censorship pushes to be strongest in the US/Canada/EU, not some random smaller country. Then again, Paypal has historically had a very rocky relationship with any place outside the main western countries, so this may be another instance of that. Then again then again, you just said "not US", so maybe you ARE in the EU/UK. That might explain it as well.