It would certainly be quite fun and add a competitive side to nations, actually giving them a point. I will soon post a thread under towns and nations on it, as well as a picture or two of an empty prototype arena. They could all be differently themed to make the fights insteresting. It could start with a fight with all town members who want to compete and pick 2 people from each town (the last two standing), then go to a national fight in which the town champions fight, then championship fight between the nation champions. And maybe every six months there would be an ultimate championship fight, where all of the previous champions from that 6 month period would fight to see who is the most supreme PvP champion of that half year.
Waterworth said he liked the idea in a conversation I had with him a few weeks before the end of V5, but under some conditions: no breaking or building blocks in the arena. Item use and switch would be fully on though.