By “Yes. Only System Emails allowed”, allowing only the basic emails like Forgot Password, Account Confirmation emails which are required for users to work.
Why it matters - When we disable emails completely (present - yes option), any new user trying to signup is completely locked out to proceed further as they don’t receive confirmation email
Where it matters - It makes sense for the communities, who would like to send newsletters instead of “digest email/ activity summary” emails or per topic/post email notifications. They still need the users to signup via emails (need for confirmation email)