You can put a black sprite with a round transparent hole in it on top of your square sprite.
Set blend mode on that black sprite with a hole to "Destination out".
Both sprites should be on a separate layer I think.
I made an example for another post, but it should give you an idea:
Interesting. I was under the impression that blends did not work across all platforms, is that correct?
What if I have something below and above the sprite? I see your background works well, but what if there is something ontop too ?
Very interesting concept. Ill need to play around with it, it has potential.