This idea could never work because many, probably most, of the settlers are violent fanatics who would be a never-ending source of violence. Just look at their violence toward Israelis trying to enforce the freeze. Most settlers are absolutely convinced that they have the right to take land on the WB and to attack Pals and their property because of religious fanaticism and delusions of racial entitlement. Such people will never agree to live peacefully under a Pal government. All Israeli settlements on the WB must be fully evacuated and the property handed over to the PA. Another problem is land ownership. Settlers obtained "their" land from Israel, which had no right to give away the property of the Pals. Thus, the settlers own no land and would only be entitled to remain in the settlements if they purchased or rented the land from the Pals. They would never agree to do so.
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Preliminary report: Shooting attack in East Jerusalem's Damascus Gate (Haaretz)
from the article: Comment / Settlers can stay, but only as citizens of Palestine