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Well if they can ensure that they are correct and that they catch all the cheaters, this seems like a decent idea

As for the implications of a cheating game, just play old PC games, namely Counter Strike 1.6 where the host can change all the setting on the fly, making for some interesting games (also hilarious wheels). I don't think that it is actually such a good idea for console games, but for PC games where modding is easier, I have no problem with private servers allowing things like this