From what I can tell, the issue with clogging in the local chat when it comes to smaller maps like bonfire itself, it's really down to that local chat has too much of a range around characters. If just this range was reduced to something more suiting like half of the current one that issue would be gone in an instance.
However, this idea is not really bad, it would be nice if there was a few more islands instead of just one, but of course that comes down to modifying the game yet again, however this might be something to be possible in the future.