The text of fn:collation-key suggests that the input of the second argument must be some kind of URI, but the hint toward this is vague:

    "If the collation URI is a relative reference, it is resolved against the 
    static base URI."

There is nothing in the text that suggests that it should otherwise be an absolute URI, that it should be in the value space of xs:anyURI or what happens when the $collation argument is not a URI at all.

Perhaps it is meant to allow any string value without error, but then the sentence on the URI should perhaps be removed or refactored.

I also wonder whether an error should be raised in case the collation is unknown. Currently, FOCH0004 might be thrown in that case, implying that if a collation is now known, it cannot possibly create a key from it, but that seems convoluted.