Well that's why I said "coupled with a hack to let you control your character." I totally agree with you about the fake difficulty otherwise. But if you don't lose your wagered item when you lose AND you can control your character... that could make for some interesting possibilities.
This, coupled with a hack to let you control your character, seems like a great way to add some very fun challenging/rewarding fights to the Colosseum in addition to the current item trading. But I get that this is just a bugfix patch. Just when I thought the game was finished though, you continue to polish things. Awesome!