Ceph OSD encryption is explained quite well in the ceph-docs:
https://docs.ceph.com/docs/nautilus/ceph-volume/lvm/encryption/
when creating an ecrypted OSD the OSD submits 2 keys to the monitor:
* the actual LUKS-key used for decrypting/opening the device (this stays only with the monitor)
* one key to authenticate to the monitor (which in turn then sends the decryption key so that the OSD can be opened).
The actual LUKS key is not written onto the OSD itself.
If some attacker gains access to your running systems with enough privilege (physical access can lead to a lot of privilege - see e.g.
https://en.wikipedia.org/wiki/Cold_boot_attack) there is nothing from stopping them to gain access to your data, since your data is live and accessible in the system (otherwise your guests would not be able to access their disk-drives).
OSD-encryption helps if the system is shut off, or a disk gets pulled out of the system.
It is also a great way to ensure that noone can salvage sensitive data from a broken disk, which you return for RMA (or recycle)
I hope that helps!