I see a couple of problems with the current WIP and blocks:
for objects inside blocks with ByParent material, parent material is ignored (object color ByParent seems to work OK)
problem with linked blocks:
Try inserting a file as linked block, ideally for this test containing objects on several different layers/materials.
Then from BlockManager switch the block from Linked to Embed, and try to run BlockEdit - all objects end up on current layer with material ByLayer.