Kind of surprised at how poorly Google handles this (I would have expected at least a correction suggestion)! Heck, it might open the door for an obscure blackhat/phishing technique...
Not Google, but apparently one way some malware tries to hide edits to, say, the hosts file is to create a duplicate hosts file with the cryllic homoglyph for 'o' and then hide the real hosts file.
Presumably this would trick users who would go check "C:\windows\system32\drivers\etc\" but not show hidden files. Seems like a niche subset, but still a neat trick.
No, you're mistaken. It is actually a very big problem. Earlier on the same page you linked to, it explain that "ICANN approved the Internationalized domain name system, which maps Unicode strings used in application user interfaces"[1].
As a concrete example, the following are fake links to Wikipedia (and entirely equivalent):
It is true that network protocols encode these internationalized domain names in a subset of ASCII, but the user sees Unicode in his browser address bar or email. There is no restriction on how applications (like browsers) display domain names[2]; they can use Unicode if they want. This lead to all sorts of devious attacks[3].
Maybe some sort of extortion scheme? Send an email to a small business person that isn't very technically savvy, say you have just erased all the search results for their business from Google, provide link, demand a Bitcoin to return the results.
Maybe a low hit rate, but if you could automate it, you could run the scam on a lot of places.
:D