What to do or how would proceed in case of a refund?

[Scura]

Just try to explain at paypal that "they" bought from you virtual currency which is not protected by the paypal protection. 

 

Unfortunately a customer can always start a chargeback by directly contact the bank (and not paypal). If is it the case, you are forced to refound the customer. You can even try to ban the player, but "he" may have sent the items to other accounts so until you not hardware ban him, may be difficult to block consequences