I like it for a light-hearted, Christmas themed quest.
In a fantasy game maybe disguise it a bit in a similarly easy, light-hearted way. Frosty's Silk Hat of Sentience is good. Lord Fraws Lowman (formerly a commoner of the lowlands, which the players discover at some point makes him formally Fraws T. the Lowman) might make a more interesting NPC, and adds something for your players to put together as they go.
Great submission. Going to modify it for use in my own game.
I combined several of your options with some extra and setting specific flare. In my version the Undertown Killer's victims always smell of flowers - the scent of a paralytic distilled from a rare flower type.
The killer is the son of a local politician, a boy who had some rather cruel tastes at the local brothels, and kept that a secret. But when one of the prostitutes threatened his father with the information, his father flew into a rage and berated his son, threatening to disown him to avoid scandal. Having lived a life of leisure to this point, and believing himself far above commoners, this was unacceptable.
The boy, not being much physically, used the paralytic to stop his victims resisting before he slit their throat. When he was finished his gruesome work by killing all the women who knew of his predilections, and went to show his abusive father how he'd 'made it all better', the father flew into a rage and hurled a vial of the paralytic at him. Getting in his eyes, it blinded him.
It's not until twenty years later, when the father is long dead and the city my game takes place in is coming out of it's economic depression, that the killer pops up again. Why? Because a good healer has moved into the town, and promptly healed his blindness.
In those dark twenty years the Undertown Killer was only able to think about his own cruel fetishes, the knife, the blood, and the poison all long since having become part of his sick fascination. He's had twenty years to become obsessed with reliving it. And now he's back to kill again.
. . . . That explanation got long fast. Heh! Thanks for the story seed!