Security is established after channel negotiation. If you go with Level 3 and full encryption, the ease of use and simplicity aspects of Bluetooth begin to fade. Level 3 would require user intervention for all services. In Bluetooth, most security issues are expected to occur above the link layer, in the application or protocol layers. However, problems can occur at a purely physical level.
Wireless networks are also vulnerable to passive eavesdropping attacks.
In this scenario, a potential hacker could simply listen for Bluetooth packets and extract data from them. The frequency-hopping characteristic of Bluetooth largely eliminates this problem. The hacker would have to know the exact sequence of hops and channels at 1,600 hops per second. We recommend using an external encryption program to pre-encrypt the data before sending it across Bluetooth. However, implementing something like WEP on top of Bluetooth would once again restrict simplicity and ease of use.