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Perhaps these groups could be regulated and insured by an even larger entity, perhaps even one with the authority to punish individuals and organizations for wrongdoing?

Great idea! Those things cost money though and users won't like paying up-front--they'll have to be sure to make up costs with obscene fees, the more obfuscated the better. To minimize pushback on the fees they should consider focusing them on the most disadvantaged users, since they're least likely to be able to do anything about it. Isn't it a great system?

With Bitcoin, you could create that third party in a trust minimized way, something impossible to do with the banking system.

For instance, if the third party refuses to authorize a legitimate transaction, you have a third key you keep offline somewhere that can be used to force a transaction through.

Then your third key would be vulnerable to the same $5 wrench attack as your seed phrase is now.

And if you lose the third key you are now beholden to the third party with no recourse