After a successful test in Steam Labs, Valve has announced a new chat filter in the Steam client. The filter will, by default, hide profanity, slurs, and other objectionable language from people a user doesn't know. Users will be able to adjust the filters for friends or leave them in place as they choose.
The tool was apparently built originally for Counter-Strike: Global Operations, Dota 2, and (oddly) Destiny 2. It will be available on Steam through the desktop, web, and mobile clients. As they mention in their announcement, individual tolerances for certain words are different. As such, users will be able to build their own personal filter of words they don't wish to see used in chat. The filtering occurs only on the receiving end, so a person who types a given filtered word in the chat interface will still see that word in their own client window, but the receiver who has the given word filtered will only see symbols.
When asked about why they didn't just outright ban certain words once they'd been added to an individual's chat filter, Valve's response was, "While we do ban profanity and slurs from being displayed in more public places like user reviews, comments, forums, and broadcasts on Steam, we do not want to outright block user text in chat, but rather, let users choose what they see from others. We know marginalized groups can reclaim language for themselves, and we don’t want to stand in the way of them from doing so when chatting with one another on Steam. Additionally, feedback from our Labs experimentation corroborates that context matters, and that strong language is often received differently when shared among Friends. So players have an option to obscure profanity and slurs from their Steam Friends, but we’ve disabled this by default."
Valve has made the full technical details available for those who are interested.