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Instead of will not always suffice instead of in lieu of —e.g.:
“The two were sent to jail in lieu of $100,000 bond or $50,000 cash bail.”
OED reads "in exchange or return for, as a payment, penalty, or reward for."
However I cannot grasp what the example exactly means.
(Converting this to an answer as requested.)
There are certain contexts in which the formula in lieu of is always used, and it wouldn't sound right to replace it with instead of. One such context is official arrangements, such as an employee dismissed without notice being given a month's salary in lieu of notice, or, as Michael says, people taking 'time off in lieu' after working outside normal hours.
Based on your comments to Kate Bunting’s answer, it appears that your question isn’t asking about “in lieu of” in isolation, but its function in the presence of “or” within the original context. This answer addresses that aspect of your question, leaving the discussion of “in lieu of” to Kate Bunting’s answer.
Your quote sets up a choice between a ‘time in jail’ penalty and a monetary penalty.
The word “or” in the quote distinguishes between two forms of monetary penalty, one of which is called a bond and the other, bail.
The quote says that the ‘time in jail’ option was imposed instead of either monetary penalty.
