If that is the people’s choice, then they can operate similar systems in the Federation. Not all democracies operate under the same rules and there are a myriad of member states that have developed their own style of governance depending on how they wish to be governed.
As for being tied to territory, that was one of the main reasons why the Yiona reforms broke up the existing colonial system to ensure that all parties in the Federation were effectively represented at the interstellar level, rather than existing as a peripheral entity orbiting the metropole.
I’m sure they would also agree it is far easier to control individuals on a space station than it is to control individuals on a planet.