I think the title is the reason why this didn't get much attention, but fiat hosted channels are an interesting topic.

I don't think we can't stop people from using custodial services or fiat. In fact if you use fiat, I think its by definition custodial. What we can do is encourage non-custodial services and products whenever possible and sensible. Wherever you HAVE to use a custodial service (anything fiat for example), only suggest ones that can be held accountable. Small community banks and credit unions can be held to account more easily than say large, international corporate banks.

A protocol like this allows for anyone to spin up a community "lightning bank" very easily. The only barriers to entry seem to be knowing how to operate a lightning node and having the liquidity on hand. This means that competition can easily spring up and overtake bad or incompetent actors. The fact that this software has to be compatible with lighting means that more often than not, the lightning bank must essentially be a full reserve bank. You will have cryptographic proof that you were screwed, which makes it easier to tarnish, if not destroy, the reputation of the bad or incompetent actor.

Trust is a scary thing, especially in this community. However, I don't think Bitcoin is here to completely erase trust. I think Bitcoin will minimize and erase trust where its not appropriate. It will bolster trust where it is appropriate or unavoidable.