If someone made the client-sided mod for the chat and a modified ban hammer, I'd be willing to put together an arena. I honestly didn't expect this topic to still be alive, let alone get this many posts.
I did discuss the practicality with a few scripters today. Yes, the chat would need a client-sided bit to it, but it doesn't necessarily HAVE to be required, it would just make things more interesting. It would just be a part of the server message "Make sure you download chat cut-off for even more hilarity!"
I considered the possibility of a 5 minute long ban when people get hit, but then the server would vacate REAAAAALLY quickly.