I'd create a penal island, kinda like the real-life Devil's Island.
This island would be an isolated spot, maybe right in the middle of Tradewind Sea, with the sea as its only escape route. NPCs would run a ferry service for arrivals and departures, and freedom would only come after serving your time. Players acting as pirates could even ambush the ferry to free prisoners.
At the same time, to those stuck on the island would have a chance to gather materials, do PvE to keep the prision in good shape (cooking, repairing, cleaning, etc), and build their own ships to escape long before their sentence ends. This might mean PvP showdowns or cooperation, and the use of work skills. The island should be not very bountyful on resources, so folks would have to fight or team up for to escape.
The other players in the server could sail over there to rescue their criminal friends, or rescue anyone on the shore for maybe for a price, but such rescuers risk getting a criminal record themselves.
Law-abiding players could hunt down criminals to shorten their sentences by killing them, the more gold the prisioner lose due to repairing gear the more time will be shorten from his sentence.
This concept includes:
- A roaming penal island, where you can roam arround and complete PvE for the prisional system or do your own thing
- PvE tasks to shorten sentences
- The option to AFK until your time's up
- Building a ship for escape
- Rescues by mercenaries or criminal pals
- Ferry ambushes for freeing prisoners
- A playground for players to form criminal networks and fight over turf
- No boring jail cells—just good times chatting and causing chaos
I've done time in Ultima Online's jails—it was a blast, just fighting the other inmates and sometimes chilling. But a penal island, that would be like a carnival park for the server's merriest players, it's an island where you fight and rob everybody else
Enemies of the state, bandits, corrupted, bad mayors, etc, I can think of many reasons why someone could be sent to the island