I think that the driving force was a desire for very short domain names that worked with the *-ly naming convention; combined with the ongoing shortage of snappy and not already taken names in .com/.net/other domains that don’t sound sleazier than downmarket ‘70s Miami strip joint(lookin’ at you, ‘.biz’); with the Libyan registrars willing to take advantage of the business; but not driving the trend.
Since this predated the still-unfolding nightmare of vanity GTLDs; the various country-code TLDs were what people had to work with, and Libya’s happened to overlap with the fondness for ‘-ly’ names; and even if you could get whateverly.com; whatever.ly was deemed shorter, catchier, more mobile/twitter friendly, etc.
I really don’t know what the backstory is behind the takedown incident. Libya was defiintely more open and accessable(at least in customer service terms, not in what-the-actual-terms-of-service-say terms) than some of the national TLDs(requiring residency and/or local business presence isn’t terribly uncommon); but they didn’t go quite as far as some of the small-pacific-island nations that, with effectively zero domestic demand for domain names, operated their registrars more or less entirely as cash cows.
I don’t know if they just hit the wrong rules lawyer on the wrong day; if there was a broader policy shift away from selling vanity domains to American startups; or what; but country code TLDs, by design, are administered by an entity in the jurisdiction of that country(where political reality allows, I think that there may be one or two that don’t actually have a state attached anymore); so going for a cute domain name in one of them always means adding another jurisdiction to worry about.
Sometimes this is an advantage(the pirate bay has very strong recognition of their domain name and has burned through about a zillion suffixes); other times, less so; like the .ly cases. I get the impression that a lot of the people involved just didn’t think about it: everything seemed frictionless enough; it was all ‘on the internet’, they didn’t need to hire a shady fixer/translator to hand off a suitcase full of cash, so it must follow basically the rules we assume that stuff on the internet follows, right? Not.So.Much.
