Was just talking about this with the wife last night. We're both black belts (I'm first degree, she's an ignorant nothing-degree), and she's recently coming back into the game after recovering from having our kid. She loathes the fact that she still has to wear the black belt. I don't get what her fuss is. The following viewpoints emerge.
She is of the philosophy that for all BJJ belts, there should be both a technical knowledge requirement (the ability to successfully land techniques in live rolling, i.e., you should have hit 2 sweeps from ____ guard, a submission from ____guard, etc.), and a general beatdown requirement (i.e., brown belts should always smash white belts, no excuses). I asked her if that meant that people who gained a belt but lost ability due to injury, time out, life getting in the way of training, etc., got demoted. She said yes, and that she wishes she could get demoted, as being out for a year+ has dulled her skills, and she feels like a bad representation of the school for being a rusty black belt. She likened it to the Sumo ranking system, where you move up and down based on performance, and that even a Yokozuna has to give up their spot if they start to degrade. Women are brutal.
I'm a hippy by comparison, because when I was a young boy I saw a Helio Gracie interview where he said belts are for demonstrating your ability to understand and transmit BJJ, and that fighting ability is a separate thing. If you want proof of fighting ability, that's what tournament medals/MMA belts are for. Those document your fighting ability within that period of time, not your belt. An older, less athletic 4th degree black belt is going to have some cool shit to tell you. Just because he isn't fast enough to pull it off on the black belt adult competitors doesn't mean he is worse at BJJ than the youngsters. And when you're looking for someone to teach you things, it helps to have a color code of "who can teach me more cool shit" as opposed to "who is a fucking monster."
The flaw in her approach is that, practically, it's a fucking nightmare. Tournaments would be insane. Sandbagging would be worse than ever. Unless people started having their tournament wins/losses tracked I guess into some kind of promotion points system ala Judo. Small people, women, and the elderly will live their lives fairly low on the totem pole. Getting injured or taking time off means having to start the process over, you'll probably never return. Constantly have to smesh the lower belts. But it would make for some hard ass grapplers. Also then we'd start having to recognize the grappling skill carryover from other arts (i.e., wrestling, judo, etc.), and fast tracking them for promotion. That's practically admitting their art is just as valid is BJJ, which is such haram it makes me want to start a second BJJihad. I'm kid, but it's another facet to consider.
The flaw in my approach is it turns into a TMA if you're not careful, where ability to perform ceases to matter, which is the beginning of the end. It seems more fair, but it also leans more towards arm chair grappling. It also leads to situations like you're discussing above.
I think Judo has a pretty cool concept, but I don't know how you'd scale it with the amount of time required for a black belt in BJJ, and the vast body of (constantly changing) techniques. Hell, we'd have to agree on what "basics" are first, and god help us all for that. Though the idea of a BJJ Self-Defense Kata to shut up the self-defense nerds would be neat.