To provide an encryption method to the Encrypt API module, you need to do a couple things:
function encrypt_ctools_plugin_directory($module, $plugin) {
  if ($module == 'encrypt') {
    return 'plugins/' . $plugin;
  }
}
So, with this implementation, ctools will look for encryption method plugins in plugins/encryption_methods and key provider plugins in plugins/key_providers. You can load plugins however you'd like, but this is sort of a ctools standard.
$plugin = array(
  'title' => t('Mcrypt AES 256'),
  'description' => t('This uses PHPs mcrypt extension and AES-256.', array('!url' => 'http://en.wikipedia.org/wiki/Advanced_Encryption_Standard')),
  'encrypt callback' => 'encrypt_encryption_methods_mcrypt_rij_256',
  'dependency callback' => 'mcrypt_extension_is_present',
);
The plugin can just be declared in the global space; no need to wrap it in a function or anything. Available options for the $plugin array include:
/**
 * Callback to see if the MCrypt library is present.
 */
function _mcrypt_extension_is_present() {
  $errors = array();
  if (!function_exists('mcrypt_encrypt')) {
    $errors[] = t('MCrypt library not installed.');
  }
  return $errors;
}
/**
 * @param $op
 *  The operation currently being performed. 'encrypt' for encrypting, 'decrypt' for decrypting
 *
 * @param $text
 *  The string to be encrypted or decrypted.
 *
 * @param $key
 *  The encryption key to use for encrypting. Provided by the active key provider.
 *
 * @param $options
 *  An array of additional parameters.
 *
 * @return
 *  The processed (either encrypted or decrypted, depending on $op) string.
 */
function your_encryption_callback($op = 'encrypt', $text = '', $key, $options = array()) {
  // Do stuff.
}