I think it would make more sense as follows:
Your first scenario would amount to the same, ie A risks 0.25 BTC, B 1 BTC.
However, in the second case (bet size 0.625), A would again risk 0.25 BTC and B would risk 0.375
I disagree.
Think of it like this: A and B are both running their own sites. How much does each risk?
When someone wants to bet the maximum, A risks 0.25 BTC and B risks 1 BTC. We agree.
Then someone wants to bet half as much. I think each should get half of what they did on the max bet:
A:0.125, B:0.5
You're suggesting that A should get some of B's action. Why's that? How is it fair that A gets to take some of B's share, only on the relatively safe bets? The safer the bet, the more A gets to take of B's action. We reward B's willingness to run at full Kelly by giving him 4x the action that A gets, on every bet. Everyone prefers lots of small bets to a few big ones.
B wants to risk 4x what A risks. So that's what happens. It's just as if every investor was running their own separate game.