I hardly consider myself qualified to teach the use of VS. But I'll give it a go... Of course, this is all based on the sample Steve Jones had posted some time ago. If I get really inspired, I'll try to capture the VSX3 screens as I do this live, but for now, a very long text will have to do
HOW TO BLUR FACES in VSX3
First, make a copy of your clip in the overlay track (X3 makes this really easy: right-click the clip in the time line, select "Copy", then mouse over the overlay track, and click it down). Line them up so they both start and end at the same times.
If you need to to apply the Video Pan & Zoom filter to your clip, do it first, and copy the attributes to the overlay clip so they match.
Make sure you have unchecked the "Replace Last Filter" checkbox in the Attribute options window. You will be applying multiple filters to this overlay clip.
Now, apply the Cropping filter to the overlay clip, and click Customize Filter. Crop the frame down to just the face, or license plate, etc. Remember that the cropped area will move between keyframes, so you can get the moving path effect by inserting keyframes and moving/adjusting the cropped area. Don't be afraid to make lots of keyframes, each with its own cropped area. You can select the exact part of the screen you want, and even follow the action around on the screen, with this approach.
Set the Fill Color to all green and accept the filter setup with the OK button.
Now, apply the Average filter to your overlay clip and click Customize Filter. Set both keyframes to the Cell Size you want. I usually use 20 or 30. You can also use Mosaic or FX Mosaic if you prefer.
If I want to obscure the image even more, I sometimes use both the Average and FX Mosaic filters at the same time. I think it adds some extra anonymity.
Now, put the filters in the right order using the up and down arrows to the right of the filters listed in the Attributes window. You'll want Cropping at the top, followed by Average/Mosaic and finally Video Pan and Zoom, if you used it.
Finally, with the overlay clip selected, look in the Attributes Options window and click "Mask & Chroma Key." Check "Apply Overlay Options," with the Type of "Chroma Key" and select the same color in the Similarity color box that you set in the Cropping filter. I usually use all green. Set the percentage slider to around 50%.
Now go back to the Project view and scroll in the timeline. You should see a blurred/obscured box moving around the screen.
If you don't like the fade transition around your blurred area, and want a sharp line, just move the Cropping filter below the Average/Mosaic filter(s).
To prevent the audio from being louder (because it is being played by both the primary video and the overlay video), right-click the overlay clip and then Split Audio. Delete that audio track to leave just one (in the primary video clip).
IF YOU ARE USING VSX2
I was unable to make this work using just the overlay in X2. Instead, follow all the same process above, but with just the primary clip. Just follow all the steps for the overlay clip on the primary clip instead. Then, render that clip to an output file. Use the highest quality you can. That clip, when rendered, should be all green, with just the cropped area showing the blurred face.
Now, in your final project file, put the original clip in the primary video track, and your rendered clip in the overlay track. Set the Chroma Key as described above (you don't need any other filters because we already used them in the rendered file), and voila! I don't know why, but X2 always treated the overlay as if it were transparent, but a rendered clip would obscure the face correctly.