LFSRs CAN be used to encrypt sequences of bits - this is the basic algorithm used to generate CRCs (well nowadays, they are now often generated by looking up data in tables, data generated by the LFSR).
When used to generate a sequence of pseudo random numbers, the state of the LFSR is based on the initial seed. The LSB of the next state is based on the XOR of data from all of the taps.
When used to encode a bit sequence, the next bit of the sequence is also XOR'ed with the tap data to generate the LSB.