Yes, while it is possible to run your local wireless Access Point with out encryption, and this requires less setup, it is strongly recommended that you encrypt it. Not encrypting it can result in un-authorized people accessing your network, they could be using systems that are not secured, and may introduce viruses to your network or pose a security threat. As well as possibly saturating your available bandwidth, and causing spam issues.

Securing your Wireless Network
(article written by PracticallyNetworked.com)

These days wireless networking products are so ubiquitous and inexpensive that just about anyone can set up a WLAN in a matter of minutes with less than $100 worth of equipment. This widespread use of wireless networks means that there may be dozens of potential network intruders lurking within range of your home or office WLAN.

Most WLAN hardware has gotten easy enough to set up that many users simply plug it in and start using the network without giving much thought to security. Nevertheless, taking a few extra minutes to configure the security features of your wireless router or access point is time well spent. Here are some of the things you can do to protect your wireless network:

1) Secure your wireless router administration interface
Almost all routers and access points have an administrator password that's needed to log into the device and modify any configuration settings. Most devices use a weak default password like "password" or the manufacturer's name, and some don't have a default password at all. As soon as you set up a new WLAN router or access point, your first step should be to change the default password to something else. You may not use this password very often, so be sure to write it down in a safe place so you can refer to it if needed. Without it, the only way to access the router or access point may be to reset it to factory default settings which will wipe away any configuration changes you've made.

2) Don't broadcast your SSID
Most WLAN access points and routers automatically (and continually) broadcast the network's name, or SSID (Service Set IDentifier). This makes setting up wireless clients extremely convenient since you can locate a WLAN without having to know what it's called, but it will also make your WLAN visible to any wireless systems within range of it. Turning off SSID broadcast for your network makes it invisible to your neighbors and passers-by (though it will still be detectible by WLAN "sniffers").

3) Enable WPA encryption instead of WEP
802.11's WEP (Wired Equivalency Privacy) encryption has well-known weaknesses that make it relatively easy for a determined user with the right equipment to crack the encryption and access the wireless network. A better way to protect your WLAN is with WPA (Wi-Fi Protected Access). WPA provides much better protection and is also easier to use, since your password characters aren't limited to 0-9 and A-F as they are with WEP. WPA support is built into Windows XP (with the latest Service Pack) and virtually all modern wireless hardware and operating systems. A more recent version, WPA2, is found in newer hardware and provides even stronger encryption, but you'll probably need to download an XP patch in order to use it.

4) Remember that WEP is better than nothing
If you find that some of your wireless devices only support WEP encryption (this is often the case with non-PC devices like media players, PDAs, and DVRs), avoid the temptation to skip encryption entirely because in spite of it's flaws, using WEP is still far superior to having no encryption at all. If you do use WEP, don't use an encryption key that's easy to guess like a string of the same or consecutive numbers. Also, although it can be a pain, WEP users should change encryption keys often-- preferably every week. See this page if you need help getting WEP to work.

5) Use MAC filtering for access control
Unlike IP addresses, MAC addresses are unique to specific network adapters, so by turning on MAC filtering you can limit network access to only your systems (or those you know about). In order to use MAC filtering you need to find (and enter into the router or AP) the 12-character MAC address of every system that will connect to the network, so it can be inconvenient to set up, especially if you have a lot of wireless clients or if your clients change a lot. MAC addresses can be "spoofed" (imitated) by a knowledgable person, so while it's not a guarantee of security, it does add another hurdle for potential intruders to jump.

6) Reduce your WLAN transmitter power
You won't find this feature on all wireless routers and access points, but some allow you lower the power of your WLAN transmitter and thus reduce the range of the signal. Although it's usually impossible to fine-tune a signal so precisely that it won't leak outside your home or business, with some trial-and-error you can often limit how far outside your premises the signal reaches, minimizing the opportunity for outsiders to access your WLAN.

7) Disable remote administration
M ost WLAN routers have the ability to be remotely administered via the Internet. Ideally, you should use this feature only if it lets you define a specific IP address or limited range of addresses that will be able to access the router. Otherwise, almost anyone anywhere could potentially find and access your router. As a rule, unless you absolutely need this capability, it's best to keep remote administration turned off. (It's usually turned off by default, but it's always a good idea to check.)