If you look at the video you can see how the amount of black light in a given spot changes the brightness of that spot. It could be cool to create different light patterns, changing the intensity of the leds with the speed of the bike.
No. Most countries rightfully regulate light sources on vehicles. That would only serve to irritate drivers, not warn them or make it easier to identify you.
The US is not one of these countries, though some states and localities require lights on bicycles and that they be particular colors. Germany specifies that the rear red light must not be constant-on, but many people believe that blinking rear lights confuse drivers at night (attract drunk drivers, affect distance perception of normal drivers, etc.) and since the jury is still out, it's nice to be able to make your own decisions rather than require the government to make them for you.
I don't see any safety problem with "pimping out" your bike with rim lights that change color with the bike's speed. Just realize that you look like a twelve year old kid when you do. And make sure you have real lights for actual riding.