If it were to use the other device's bluetooth UUID for location then it would just be aware of information that is already being transmitted by the phone and would not really affect the privacy of wither user any more than is currently happening should bluetooth be on.
Another solution would be different and would be more appropriate with an opt-in/more robust privacy.
The bigger picture is the possibility of interactions as described here:
http://www.mindjack.com/feature/phone012606.HTML
But for the purposes of contexts to get things done, having awareness of other people's devices would be pretty powerful.