How to use gmail as smtp server in admin_options.php?

All that setting the input type to "password" does is hide the actual characters in the box so that someone can't look over your shoulder and see what you've typed, so as long you don't let people look at your monitor when you're on the admin panel it's irrelevant.

I don't know much in terms of encryption but AFAIK the problem with that is that while pretty much all PHP environments supported by PunBB will do "one-way" encryption (I'm not quite sure what the correct term is), not all support both encrypting and decrypting. PunBB can encrypt a password submitted by a user upon login and compare it to the encrypted version stored in the database, so there's no need for decryption, but PunBB needs to send the SMTP server a decrypted password, which would require the capability to decrypt an encrypted stored version.