This option specifies whether to use encrypted passwords when a client authenticates. The default is yes, which means the server requires encrypted passwords. Do not turn this off unless you have a very good reason to trust that network traffic won’t be sniffed!
If you use encrypt passwords = yes, you need to use the smbpasswd program to keep track of usernames and passwords for Samba purposes. Read the man page of smbpasswd to find out more about this command.