I'm not sure I quite understand your question. Do you require your customers to have a valid licence to use your module on their local machine? If that answer to that is "Yes", then I think I can see where you're coming from.
When we designed Licence Master, we took a scenario in which a module is being used on the same machine as the web server to be a development scenario, and one which in general will not require a valid licence.
However, your idea of substituting the local machine name for localhost will enable you to require a licence for a localhost scenario, but you need to make sure you make the substitution it whenever you call any LicenceClient method that has a domain parameter. Also, you will need to tweak the regular expression on the domain field's validator in Registration.ascx as that currently only allows either localhost or a valid domain name.
One word of caution using the machine name: unlike a domain name, it is not guaranteed to be unique: you could concievably get two customers who use the same machine name and you would be in the same position as with localhost. Could you use the local machine MAC ID instead?