Braintree is owned by Paypal (Europe) S.à r.l. (Luxemburg for European merchants/US for US merchants/asian clients depending on the country but usually HK), so when you sign the contract as a EU client, you sign with the Lux entity.
this method to block funds is unknown by authorities and start to be discovered by Stripe and Braintree competitors. So far, nothing and I am convinced it will stay like this for some time.
Braintree/Paypal will tell you that you sign a contract and they warned you (which is abusive ofc)
How can they do it?
When a PSP/acquirer onboards a merchant, they create a unique MID for each merchant (where you are the only one to process payments on it).
However, the merchant needs to pass the KYC process (with all the documents etc.)
Braintree are doing it a bit differently to be able to accept clients faster. They own aggregated MIDs where they place many merchants on it for some weeks/months so each merchant can pass the KYC and then having their own MID.
It is supposed to be very limited and almost illegal by Visa and Mastercard but... I will say that Paypal is big enough to decide about some rules.
Good luck for your initiative, it will not be easy.
Btw
Stripe is doing the same when they accept your business and then block it for several reasons.