Piotr Zapart of hexeguitar.com created this rotary encoder board with LED ring:

Mounting board for the Panasonic EVEP series rotary encoders equipped with I2C driven 16 LED ring.

LED driver is built around the MCP32017 16bit I2C IO expander. Up to 8 modules can be used on the same I2C bus.

hexeguitar has shared the board on OSH Park:

Encoder board

Here’s a video of the project in action: