Sounds reasonable, I might have a few more comments when I see actual code, but in principle it sounds fine.
In particular, I anticipate there may be performance issues. A virtual library is just a search, and while the db api and the server both have caching infrastructures, they may not work well with different VLs per request.
Also, there will need to be some kind of UI for configuring this in Preferences->Sharing over the net.
Using a branch is fine.
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