I finally tracked down Shayde! Shayde wrote the timedemo crack and encrypted file decoders for the C1 demo and full version. He very nicely dug around his old source code (this was 10 years ago now), found them, and sent me the code. I ported it to c#, and now it means that OpenC1 will be able to read both encrypted and unencrypted files.
This is awesome, because I want to release my OpenC1 along with the completely original, unmodified Carmageddon 1 demo files. This means you don't have to have an old copy of Carmageddon lying around to try out my engine, and also I don't annoy anyone at Stainless / SCi by distributing content from the full game!
Thanks again Shayde - even now I don't know how you managed to work the encryption out :)
Edit: And tire tracks are now done, and look awesome :)