Unless there is something about Final Fantasy VII about yellow lines, this is probably a reference to the idiom
Have/had a yellow streak down one's back: to be cowardly.
The origin of this idiom is slightly opaque, but the color yellow is generally associated with cowardice:
yellow: (informal) Lacking courage, cowardly
yellow streak: (informal) a cowardly or weak trait, characteristic, or flaw in a person's nature; a tendency to be cowardly, craven, etc.
If this is the source of the idiom, then it is a pun on the word streak, which can mean either a habit or a smear of paint.
Therefore the line
The only line between good and evil is the yellow one running down your back.
The only thing that separates good and evil is how cowardly you are.
Presumably this is an exhortation to get you to play the game, be the hero, overcome all fear and cowardice, and stop the bad guy.