It really depends on what is using UDP; UDP is as you say just a Protocol which carries data. The application will need to ecrypt the data at a higher level in the ISO Layer in order for UDP to carry encrypted data.
There dosent seem to be much point in blocking it though, especially if you are using some type of voice application through Messenger, Netmeeting, gamevoice or that Kazza thing as they all use UDP as the protocol for carrying voice as it dosent get retransmitted like TCP if there is a problem on the network.