In a large mixing bowl, combine the ground chicken, Panko breadcrumbs, chopped red chili pepper, minced garlic, garam masala, nutmeg, green onions, cilantro, egg, salt, pepper, and optional red curry paste. Mix well until all ingredients are thoroughly combined.
With clean hands, shape the mixture into meatballs about 1 to 1.5 inches in diameter. Place them on a plate or tray as you go.
In a frying pan, heat the peanut oil over medium heat. Once the oil is hot, carefully add the meatballs in batches, ensuring not to overcrowd the pan.
Fry the meatballs for about 5-7 minutes, turning occasionally, until they are golden brown on all sides and cooked through. Remove the meatballs from the pan and set aside.
In a large pot, add the lemongrass, chicken broth, red curry paste, coconut milk, curry powder, salt, and pepper. Bring the mixture to a gentle simmer over medium heat, stirring occasionally.
Once the sauce is simmering, add the cooked meatballs to the pot. Toss them gently to coat in the sauce. Add the Kaffir lime leaves, and let it simmer for another 10-15 minutes to allow the flavors to meld together.
Remove the pot from heat. Serve the meatballs in bowls, garnished with sweetened shredded coconut (if using) and a sprinkle of fresh cilantro. Pair with steamed rice or noodles for a complete meal.