How does not encrypting local storage relate to this story? You're just pulling that one out of thin air to somehow prove your point. Besides the fact that there is no correlation between encrypting local storage and intercepting keystrokes or more broadly owning the kernel, it's also false. Though there are concerns with how disk encryption is implemented in Android and there are ways around it, it's come with FDE since version 5.0.

Encrypting local storage wouldn't have saved you one bit from this kind of thing where they just intercept the keystrokes. And your app wouldn't be safe from it either.