The downsides are:
- the exchanges should trust each another for fiat and/or have common bank accounts, i think that this should be possible
- since that this way forces to a decentralization of the trading, existing exchanges won't have any incentive to migrate to the new platform, hence, this project (if feasible, i'm asking for your opinion about this), will probably never take off.
I'd like to address your first whole half with the question "Where is the incentive?" and this half with the same question.
I'll also note that your downsides noted here are not simply something that can be assumed away. The're very real problems and they can't be dealt with by wishing them away.
Even if all of these problems get solved in the manner you've proposed (which they won't there's no incentive to solve them in such a manner) and the exchanges magically trust eachother, it's not the exchanges I'm worried about. It's people with guns and in control of armies. Solve that one.
Many centralized exchanges are still the crux of the issue here... centralized. I suggest you re-examine your first assertation that we can't create a decentralized exchange and work on solving the problem at that level.