A cruder version of this was created by the 1001 Crew already in 1986 by the name of ESCOS (Expanded Screen COnstruction Set). There's a video [1] and info page [2].
It was able to import images from KoalaPad, convert, and render it fullscreen using sprites both inside and outside the C64's border.
I will definitely take time to read the full article, it's super interesting at first glance.