Server-side physics in itself is nothing new or unheard of, many large multiplayer games that use a client-server model will use a combination of client side and server side calculations to a degree. Latency can be an issue, but this approach generally solves more issues than it causes(It's the basis of a lot of basic anti-cheat measures) and those it does cause can be mostly hidden with client side tricks. Crackdown 3 is set to take that up a notch by having the multiplayer servers have large amounts of additional processing power dedicated to physics calculations.