What was the problem with putting Sherlock in an actual prison? Does Mycroft think he's smart enough to escape? Even under extreme security conditions? Is he afraid Sherlock fans (readers of John's blog) will riot? A case could be made for prosceuting John too, as an accomplice, even if from we what we saw, he wasn't, morally.
(Pretty ironic - Moriarty "smeared" Sherlock but his reputation has been so thoroughly turned around that when he actually kills someone, it's not safe to prosecute him in the normal way.)
Or could it be that Mycroft advocates this punishment because he secretly believes Sherlock will actually survive the M16 mission? Perhaps Sherlock did something very like, and survived, during his two years of hiding? It's supposed to be "hardly merciful," and mean near-certain death, but it also seems like the kind of adventure Sherlock would be amenable to, and therefore, not entirely a punishment.
Or does Mycroft know/believe that the REAL punishment, in the sense of the thing that truly hurt and upset Sherlock, is the separation from John?
I'm wondering, too, about the accuracy / honesty of NOT exiling Sherlock because he's the only one who could stop Moriarty: what about Mycroft himself? Seems like Sherlock's out-gambiting Moriarty before took a LOT of involvement by Mycroft...