It's "voice inversion" [1] which conceptually is just flipping the baseband signal's spectrum around a mutually-agreed upon frequency, which serves as the key. The resulting audio is difficult to understand. The UV-K5 is only capable of selecting a single key frequency; more clever schemes will have some sort of rolling code/hopping.
This is separate from CTCSS/DCS which this radio also supports, and is not a method for obscuring meaning.
You are correct that it is illegal to use on ham frequencies (which can't obscure meaning), but I wanna say it's legal to use on FRS. Of course, this radio is not type-certified for FRS, so technically that would also be illegal (although many people don't care so much about type-certification for FRS). You are correct, it has no completely legal use on this particular radio.
This is separate from CTCSS/DCS which this radio also supports, and is not a method for obscuring meaning.
You are correct that it is illegal to use on ham frequencies (which can't obscure meaning), but I wanna say it's legal to use on FRS. Of course, this radio is not type-certified for FRS, so technically that would also be illegal (although many people don't care so much about type-certification for FRS). You are correct, it has no completely legal use on this particular radio.
[1]: https://en.wikipedia.org/wiki/Voice_inversion