No, it's about detection of people who seed/download. This encryption setting in torrent clients only protects you from passive external inspection of traffic done by ISP. Your ISP will still know that you use torrents (this is impossible to hide without VPN), but with encryption it won't know specific torrents that you download/seed, and won't (easily) know ip addresses of other peers (though it's also detectable since you connect to them in order to transfer data).

However there is no protection from another peers spying on you. In order for BitTorrent to work you need to tell other peers what you are downloading and advertise your IP address. Which means that there is an implicit trust between peers. A common tactic used by IP holders is to start downloading popular pirate torrents (for which they own copyright) which gives them IP addresses of everyone who seeds/downloads specific content illegally, allowing them to proceed with legal action.