Olie, I don't think that's an issue. The frets don't drop into the neck, they rotate. As such, the surface that's there in fretless mode is more like the bottom of the fret when in fretted mode.
I do have doubts, though. One is whether the edges of the board where they meet the frets will wear or chip. You've got a very tiny gap on either side of every fret where roundwounds can chew away at the wood. Another question is what sustain is like in fretted mode. What are those rotating frets anchored into? Since they aren't solidly embedded in the fretboard, what is providing the mass at that end of the string? In fact, I have to wonder what the inside of the neck looks like to operate this mechanism. Is it hollowed out in there?
It is an interesting concept, though. I am not interested in owning one, but it would be nice to check out in person.