This is a cool idea. Each time you start up the daemon process you must type in the key. The Daemon then acts as an API to the files in the filesystem. If you wanted to get tricky, you could then start caching the encrypted/plain text files (depending on your security requirement) in memory for faster access...

I like this idea for a few reasons:

1. The key is not stored anywhere except in memory
2. The api then becomes extensible such that you can add extra functions such as change_key.
3. All the logging can be done implicitly by a framework that is in place.

On the downside tho' there must be a human nearby who can enter the password each time the daemon process is stopped, crashes, the machine goes down etc, etc... Also the key may get paged out at some point...