Completely and I mean, foot not trodden soil, new here – but perhaps as there are faction cities and such there could be a faction/sect of the monks system (again im super new so might be missing the mark here) where there is a central penal colony, and instead of time, the prisoners must mine/work for a prison currency that they then purchase their freedom with, repeat offenders or certain crimes are charged with X amount of cost gradually going up if re-offending.
That way its centralised so all prisoners can RP together, they can do some sort of task or work together to get out of jail, and there can be organised raids and events for prisoners,
Similarly each nation/city that makes use of the central prison can then post a guard to interact with the prisoners, as part of their guard RP or volunteer systems etc or as a way for players to earn out of jail money. Requirements being such as having never been imprisoned themselves (to avoid conflicts of interest.)
It ticks all the boxes as far as I can see, could be implemented in the new map effectively. Can be themed around whatever nation hosts it (and for example if it IS one nations responsibility to build and host, it could be cheaper for them to buy said nation ((I saw briefly some sort of bidding system when I read a little about ver.7 so perhaps I misunderstood this))
With regards to prisons in general I feel they are a brilliant platform for RP when done properly, however they are often left understaffed. I spent a good amount of time on various other servers running a private jail, providing RP for the inmates, and work for them to do (farms and such for me to profit and feed them from) and it solved the issue perfectly, think of a really tight security tavern.
I think the idea of doing a crime, and putting the character on hold without having to serve the time is ridiculously lenient, it's like giving an ankle bracelet to a family member when your on house arrest. All good RP is risk vs reward, without the risk? where is the challenge or enjoyment? Punishment is integral to society and should not be so easy to circumvent.