I simply do not agree that Mode 1 has any real utility. XML frameworks are by design flexible. So the question is really whether a feature should be mandated by the standard. I am arguing for consistency of treatment.
Sensitive data appear as attributes as frequently as in child nodes.
Whether the standard addresses it or not, applications will have to address it one way or the other. The node encryption was considered at the time the schema was created. In this case, the schema designer, primarily an business expert, must also tale into account encryption requirements, sometimes there may be conflicting design goals. This assumption could be fraught with pitfalls.