Actrually it's only illegal if you deface money then put it back into circulation.
Came about when coins were made using valuable metals (gold and silver) people would shave the edges of coins, then sell it. If you scraped a bit off enough gold coins, you'd have another coins worth of gold.
It's why coins have scripting, or ridges on the sides, so you could tell if they'de been scraped.
With todays unbacked currency the metals are simply not worth scraping, so the edge markings are mere tradition. unbacked means no real value, people have simply agreed that this much paper is worth an hours work.
Ken.