Greg,
You should NOT agree to the cancellation request he sent. Certainly not before getting your money back. All that agreeing to the cancellation will do is allow eBay to refund the commission fees back to him. Personally, I would deny the cancellation request to be sure he gets stuck with the fees for his fraudulent transaction (technically, you'd be saying you still want to get what you paid for, which he obviously can't provide). Work with Paypal (or Paypal / Bill Me Later in this case) to get your money back. It's a sloooow process, but they are the ones with their fingers in his bank account and are far more likely to get your money back than this kid who was running a scam from the start.
If Paypal/eBay asks you to return the card to him for a refund, make sure you use tracking for the return so that you can prove when it was returned to him. If you told them it was a counterfeit card, they may not even require you to return it. Just know that on the other end of the claim, Paypal will have already frozen the funds associated with the transaction in this kid's account.
If he's trying to get you to cancel the transaction now and send the card back to him, it's only so that he can take advantage of another trusting bidder. You don't have to be in a hurry just because he is. If it's a long, painful process to get your money back through Paypal, might as well make him suffer along with you.
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