A good idea on paper, but not so much in execution.
Bear in mind, the original Wreck-It-Ralph is effectively this generation's Roger Rabbit (that is, at least in terms of intellectual properties crossing over, Bowser and Eggman are just like Mickey and Bugs Bunny in that regard, you never see them separately). While most of the IP owners (Nintendo, Capcom, etc.) were largely okay with their inclusion as they were constantly updated on how the movie is going, their characters, their designs, their speaking roles (Zangief in particular, as he's portrayed as a drunk since he allegedly frequents Tapper's). As such, the process went by rather smoothly compared to Warner Bros's strict demands of every Warner character has to have the exact same amount of screen time as Disney characters, hence why most of the background characters in toon town are of Disney origin).
Kingdom Hearts on the other hand, is another matter. Square Enix itself is very difficult to work with, as evidenced by Cloud, Sephiroth and recently Sora's inclusion in Smash. Whereas a lot of IP owners are generally thrilled to work with Sakurai and his team and are willing to remix a lot of music, update their characters and provide whatever Nintendo needs, Square Enix is less inclined to do so. Cloud being available in Smash Ultimate from the get-go is a good example of this, where many characters have multiple spirits from their respective IPs (even Castlevania provides multiple spirits based off of enemies, past characters and even obscure titles like Kid Dracula) Cloud didn't have any of that.
He had fighter spirits, one of his FF7 attire, and advent Children attire, that's it until Sephiroth came into the picture.
So while your idea shows creativity and a way to add a colosseum mode WITHOUT adding Olympus again (which I wholeheartedly support mind you) it's not entirely feasible given the reputation Square has amassed.