So I think the issue is more about how the upgrading will compound the difficulty of HQing items. HQ+3 items already cost an arm and a leg, and are not extremely common. If the failure rate for each materia is 20% per every other materia attached you get a compunded situation.

1x.8x.6x.4x.2 =~ 1/26
so thats the chance of success, doesn't sound that bad until the failures are considered.
this means that not only will you need a crap ton of materia(which comes from gear) but you also need to get 26 HQ+3s.
Add this difficulty to the difficulty of HQing items, and you get a system that would take years to get maxed equipment.
During which time better equipment will become available, not to mention if the level cap is increase.
All in all, what will most likely be seen is a bunch of people with +3 items that have one materia on them, thats it.

Personally I feel that making materia itself will take alot of gear out of the system, and allow for more use of NQ items, that normally just get discarded. Thus I would rather SE simply have the equipment lose all attached materia, which keeps the costs more to NQ gear rather than the items everyone has worked hard to obtain. Of course, if the crafting system becomes easier to HQ things with, then the current system is fine, but I do not anticipate the two systems working well as they are described now.