So apparently Google rolled out an update where they 'm.domain.com' turn into 'domain.com' in the omnibox. In what world is this acceptable? How can they assume that 'm.' always means mobile and 'www.' is the same as the root domain for all hosts?

Let's assume that you have a blog platform offering subdomains for each user and 'm.blogplatform.com' is available. Now, any user can get that subdomain and impersonate the homepage because Emily from Chromium decided that eliding parts of the URL without any spec is a reasonable decision.