It seems that topical preparations of iodine were being used VERY early on in iodine history as a treatment for hydrocele. There is a lot of info on an improvement on this method, which involves injecting a tincture of iodine into the emptied cyst OR running a thread that has been saturated in an iodine through the cyst in order to get the iodine to the interior. As far as topical iodine usage, this is the only reference I could find:
"Having learned that the preparations of iodine had been employed as topical remedies in hydrocele"...
source: The London Medical Gazette, 1837
And here are a couple of references on iodine and hydrocele. Please note that the second link specifies "encysted hydroceles" aka testicular cysts, I presume.
"Hydrocele, a swelling of the scrotum, caused by the effusion of fluid into the coverings of the testicle or of the spermatic cord. While it may result from inflammatory conditions or from an injury such as a blow, the cause cannot always be ascertained. It forms a tense, elastic, smooth swelling, and it is distinguished from other conditions in the same situation by its translucency, which is agparent when the tumour is held between the observer’s eye and a lighted candle or a strong lamp. It may be mistaken for a rupture; but a hydrocele swelling gives no impulse under the hand when the sufferer coughs. Again, it is not, like strangulated hernia, associated with vomiting or pain. Congenital hydrocele, however, may give an impulse with coughing.
Palliative treatment consists in frequent tapping with a trocar and cannula: in the hydrocele of young children, cure may be effected by constant wearing of a truss, or by the external application of iodine. Radical cure in adults is effected by tapping and subsequently injecting iodine ; or by incising the sac, turning the covering not the outside skin) inside out, and stitching it in that position. The injection of a ten per cent. solution of chloride of zinc has lately been recommended as eflicacious, and as causing no pain or inflammation."
source: Nelson's Encyclopedia, Volume 6, 1907
A MORE EFFECTUAL MODE OF APPLYING IODINE TO THE INTERIOR OF CERTAIN CYSTS.
"Mr. Furneux Jordan, in some notes in the Lancet, remarks that he has found in practice two classes of scrotal-hydroceles, in which the ordinary methods of treatment are either difficult to use or uncertain in their result. In boys and men there are occasionally encysted-hydroceles of the testis, or the cord, which continue to increase in size, or in which treatment is urgently requested. In such cases, except in early infancy, acupuncture, or the use of a fine trocar, often fails to cure. The walls of the cysts are usually thin, and collapse so much, when their contents are withdrawn, that the injection of a fluid is uncertain. The end of the canula may be outside the cyst, and the iodine solution be consequently injected into the connective tissue at its exterior. In such cases the following is a reliable method of treatment:
"The cyst being well isolated, made tense, and brought near the surface, I pass through its centre a stout needle, armed with silk, and leave the threads hanging. The fluid quickly oozes away, especially if a little traction be made on the threads. I then, at one opening, wet the threads with iodine-liniment (liniment, because the quantity required is so limited), and draw the threads so as to leave moistened portions within the cyst. A little gentle friction will help to spread the iodine thoroughly over the lining membrane of the cavity. An hour later, freshlymoistened portions may again be drawn through, if the cyst be large, or if other methods of treatment have failed. On the other hand, in a very small cyst, a single thread, moistened and kept in one hour, will suffice."
source: Medical Brief: A Monthly Journal of Scientific Medicine and Surgery, Volume 4, 1876