Yeah I've heard about punycode. Personally, I'm well against it because it puts down non-MURRICAN English domain names as second-class citizens on the internet. If I have a website about Copiapó, a perfectly legal town, there's no good reason why the domain name should not be copiapó.cl rather than copiap-xcwhngoingohi4oleleiyho42yt4ptg4ht4.cl, making it look "suspect" and "malware-y".
There were quite some complains back in the time about Firefox choosing not to "flag" internationalized names as potentially dangerous, and pretty much all those complaints that I know of likely came from English speakers who simply can't understand other countries in the world even can have different alphabets.