On the topic of whether Blizzard should do anything about it, that's a tough question. I very much doubt that a 10-year-old is going to download the mod, so I don't think they've much to worry about there. The question really is whether Blizzard wants to allow such a mod to exist period. It could either hurt or boost sales (probably hurt in America at the moment... I'm not going to make any political comments here). It might also possibly get them into trouble, but I doubt that b/c the only reason GTA got in as much trouble as it did was b/c the content was in the game itself (they were not held accountable when it started showing-up in the PC game, as they claimed it was just modders, but when it showed-up in the console games, non-Xbox I'm guessing, that's when it was obvious Rockstar did it).
Also, the mod would require its own server to play it, no? Blizzard strictly forbids and has been cracking down on "illegal" servers, therefore any mod for WoW seems useless unless it gets Blizzard permission.
I'm not certain if it's a full mod or a skin pack which only mods the skins in your game. I'm guessing it just mods what each model looks like, mainly b/c of the problems mentioned above.
The one saving grace of it is that either way, if you don't have the mod downloaded, you won't see any of its content (as even if it's just a skin pack I'm assuming it will only display the skins for you, unless it allows you to use a nude skin for your player, but I'm still fairly certain people would need to somehow have the skin/model downloaded in order to view it).