Human bones...

Some of the bonecraft items require human bones, I have killed some humans and only option I get is to 'loot' there is no option to skin, and debone the humans.

Yup, for now you can only obtain human bones by scavenging.

The reason is to prevent exploiting of gathering human bones until I come up with a solution.

Could you put a time limit on the ownership of human bones. For example, I spawn, you kill me, get my bones, now I respawn, you kill me again, but this time you can only loot me, my bones are not "eligible" for the taking for a few hours. Almost like my dead body that was recently resurrected has not fully regained itself yet.

or

As Charlie suggested, make only those "criminal" players, the ones that kill for no reason, make their bodies able to be de-boned. So they would be hunted for a reward, their bones, and they would have to be careful about their movements in and out of towns.

That could be a solution.

Also, it seems the loot command is broken.

When you loot, how close are you to the dead player?

Some have reported looting doesn't work, but others have reported that it's fine. We've tested and the only problem is that the dead body animation is off center so you need to loot from one side. We will adjust this.