OK, so it's actually:

    My Client -> main agent -> sub-agent -> tool
                     |            |
                    log:         log:
                  enc prompt   enc prompt
                   thoughts     thoughts
                     |            |
                     V            V
                   My Client   My Client

Is that more correct? So they're not encrypting prompts to send to sub-agents, they're encrypting logging output to obscure details of the system.