I agree - granted, if done poorly it could cause a lot of issues with server lag and a variety of other thigns, but it would really open up a lot of options for modding. There are some great examples of this from minecraft that ended up working very well.
I looked through the models folder and it seems to be only the low LOD models of planets and the like, so I am not sure where the blocks themselves are stored. The models I found were described in xml, I am not sure what format they are, possible .obj or something very similar - the format looks pretty standard.