Usage in MUDs
Generally MUD clients, like most telnet clients, are responsible for echoing user input in almost all cases. Many MUD clients offer an option to disable command echoing, however, such clients are still handling echo as per user preference, and shouldn't try to pass echo to the server.
On the other hand, some MUD servers will request the client to pass echo to the server for private input like passwords as a form of rudimentary security. In this case the server won't actually echo the input and is just queuing a behavior change in the client. Once entering private fields is complete the server returns echo to the client.
MUD clients interested in supporting this private field behavior should disable command echoing and stop registering commands in any command history, logs, or similar features until server side echoing ends. This can help prevent passwords from being unwittingly shared alongside other output, screenshots, or logs, accidentally re-sent as a command via command history after the password prompt is completed, or saved in client side plain text log files.
While not critical to a MUD functionality, this does provide a bit of rudimentary security, idiot proofing, and polish to MUD password entry.
Some MUD clients don't bother implementing echo given it's limited role in MUDs.
NOTE: With Telnet being an unencrypted plain text protocol, MUD passwords can never truly be secure, but supporting echo is slightly better than nothing, especially in regards to preventing users from accidental sharing their passwords.