Just because they recorded a loss of $170 million doesn't mean they consumed that much cash. Every account that they credited $5 to they had to record as a "loss." But how many people cashed out that money? Not many I bet, I bought something on Ebay with mine. Paypal essentially created a new currency that they pegged to the dollar. It didn't cost them any cash to "print" new money in people's accounts
I don't think it's a "loss". Every new account is an asset for them, and they paid 5 dollars to "buy" accounts without actually giving cash to account owners (as you mentioned). However, unless they have assets to cover this "deferred liability", that would be a fraud. And they had access to money to cover it. So it's not a case of desperate startup with no resources, I am afraid :)
Sure, every account is an asset but the assets in accounts have to be recorded as liabilities - that is why they had losses way in excess of the cash they raised. The point of the article is PayPal ran risks (violating banking laws, risking a run on their cash) an established company never could have.
