Thanks for the proposal! My main concern is the optional decryption.
The encrypted transactions are put at the bottom of the block and only revealed if the key provider reveals the keys. That means there could be encrypted transactions at the bottom of the block that e.g. make a swap to buy ETH. The transaction is only decrypted if the swap turns out to be valuable at the last moment the keys must be released, otherwise, the transaction remains encrypted. Note that this is later than when the block must be committed to. This is akin to the free option problem in ePBS where the builder may decide whether or not to reveal its payload based on its ex-post trading performance. Key providers could do the same thing. This is undesirable because space on-chain is wasted in providing these options and it further complicates block building. Note that this option is less costly to exercise because instead of losing the entire block, only the encrypted transaction value is lost but even the fees from the transactions are paid. In the extreme, the builder could become a key provider and only include its own encrypted transactions that aim to extract MEV.