UTF-8 is the modern character-set including all letters of all languages. That's the character-set that Joomla and CB uses since many years, and that is specified in all Paypal payment button forms.
Paypal is using UTF-8 in their notifications too when using UTF-8 forms, and was for API callbacks too. Suddenly it now stopped using this, and replies to the API callbacks with Windows-1252 which has only few non-ASCII characters, and substitutes the UTF-8 characters with hex 1A characters (you see the "1A" in your original post if you "Edit" it).
It is clearly a Paypal.com bug. You can point your Paypal support contact to this thread, as best would be that they fix their bug.
You can follow our attempts to workaround it in our ticket:
forge.joomlapolis.com/issues/8790