diff --git a/internal/db/fetcher/versioned.go b/internal/db/fetcher/versioned.go
index 6ce8f94ebc..933e4cf603 100644
--- a/internal/db/fetcher/versioned.go
+++ b/internal/db/fetcher/versioned.go
@@ -415,7 +415,7 @@ func (vf *VersionedFetcher) processBlock(
 		vf.mCRDTs[crdtIndex] = mcrdt
 	}
 
-	err = mcrdt.Clock().ProcessBlock(vf.ctx, block, blockLink)
+	err = mcrdt.Clock().ProcessBlock(vf.ctx, block, blockLink, false)
 	return err
 }
 
diff --git a/internal/db/merge.go b/internal/db/merge.go
index 920ecd78cb..f476a509a7 100644
--- a/internal/db/merge.go
+++ b/internal/db/merge.go
@@ -274,13 +274,13 @@ func (mp *mergeProcessor) mergeComposites(ctx context.Context) error {
 	for e := mp.composites.Front(); e != nil; e = e.Next() {
 		block := e.Value.(*coreblock.Block)
 		if block.IsEncrypted != nil && *block.IsEncrypted {
-			continue
+			onlyHeads = true
 		}
 		link, err := block.GenerateLink()
 		if err != nil {
 			return err
 		}
-		err = mp.processBlock(ctx, block, link)
+		err = mp.processBlock(ctx, block, link, onlyHeads)
 		if err != nil {
 			return err
 		}
@@ -293,6 +293,7 @@ func (mp *mergeProcessor) processBlock(
 	ctx context.Context,
 	block *coreblock.Block,
 	blockLink cidlink.Link,
+	onlyHeads bool,
 ) error {
 	crdt, err := mp.initCRDTForType(block.Delta.GetFieldName())
 	if err != nil {
@@ -305,7 +306,7 @@ func (mp *mergeProcessor) processBlock(
 		return nil
 	}
 
-	err = crdt.Clock().ProcessBlock(ctx, block, blockLink)
+	err = crdt.Clock().ProcessBlock(ctx, block, blockLink, onlyHeads)
 	if err != nil {
 		return err
 	}
@@ -325,7 +326,7 @@ func (mp *mergeProcessor) processBlock(
 			return err
 		}
 
-		if err := mp.processBlock(ctx, childBlock, link.Link); err != nil {
+		if err := mp.processBlock(ctx, childBlock, link.Link, onlyHeads); err != nil {
 			return err
 		}
 	}
diff --git a/internal/merkle/clock/clock.go b/internal/merkle/clock/clock.go
index 62a7a145a6..f8d7449ca4 100644
--- a/internal/merkle/clock/clock.go
+++ b/internal/merkle/clock/clock.go
@@ -112,6 +112,7 @@ func (mc *MerkleClock) AddDelta(
 		ctx,
 		block,
 		link,
+		false,
 	)
 	if err != nil {
 		return cidlink.Link{}, nil, err
@@ -168,13 +169,24 @@ func (mc *MerkleClock) ProcessBlock(
 	ctx context.Context,
 	block *coreblock.Block,
 	blockLink cidlink.Link,
+	onlyHeads bool,
 ) error {
-	priority := block.Delta.GetPriority()
-
+	if !onlyHeads {
 	err := mc.crdt.Merge(ctx, block.Delta.GetDelta())
 	if err != nil {
 		return NewErrMergingDelta(blockLink.Cid, err)
 	}
+	}
+
+	return mc.updateHeads(ctx, block, blockLink)
+}
+
+func (mc *MerkleClock) updateHeads(
+	ctx context.Context,
+	block *coreblock.Block,
+	blockLink cidlink.Link,
+) error {
+	priority := block.Delta.GetPriority()
 
 	// check if we have any HEAD links
 	hasHeads := false
diff --git a/internal/merkle/crdt/merklecrdt.go b/internal/merkle/crdt/merklecrdt.go
index abc0ffeb51..85e42952cf 100644
--- a/internal/merkle/crdt/merklecrdt.go
+++ b/internal/merkle/crdt/merklecrdt.go
@@ -47,7 +47,10 @@ type MerkleClock interface {
 		delta core.Delta,
 		links ...coreblock.DAGLink,
 	) (cidlink.Link, []byte, error)
-	ProcessBlock(context.Context, *coreblock.Block, cidlink.Link) error
+	// ProcessBlock processes a block and updates the CRDT state.
+	// The bool argument indicates whether only heads need to be updated. It is needed in case 
+	// merge should be skipped for example if the block is encrypted.
+	ProcessBlock(context.Context, *coreblock.Block, cidlink.Link, bool) error
 }
 
 // baseMerkleCRDT handles the MerkleCRDT overhead functions that aren't CRDT specific like the mutations and state
diff --git a/tests/integration/encryption/peer_test.go b/tests/integration/encryption/peer_test.go
index 6793f3991f..6d9c937278 100644
--- a/tests/integration/encryption/peer_test.go
+++ b/tests/integration/encryption/peer_test.go
@@ -23,14 +23,7 @@ func TestDocEncryptionPeer_IfPeerHasNoKey_ShouldNotFetch(t *testing.T) {
 		Actions: []any{
 			testUtils.RandomNetworkingConfig(),
 			testUtils.RandomNetworkingConfig(),
-			testUtils.SchemaUpdate{
-				Schema: `
-					type Users {
-						name: String
-						age: Int
-					}
-				`,
-			},
+			updateUserCollectionSchema(),
 			testUtils.ConnectPeers{
 				SourceNodeID: 1,
 				TargetNodeID: 0,
@@ -63,3 +56,92 @@ func TestDocEncryptionPeer_IfPeerHasNoKey_ShouldNotFetch(t *testing.T) {
 	testUtils.ExecuteTestCase(t, test)
 }
 
+func TestDocEncryptionPeer_UponSync_ShouldSyncEncryptedDAG(t *testing.T) {
+	test := testUtils.TestCase{
+		Actions: []any{
+			testUtils.RandomNetworkingConfig(),
+			testUtils.RandomNetworkingConfig(),
+			updateUserCollectionSchema(),
+			testUtils.ConnectPeers{
+				SourceNodeID: 1,
+				TargetNodeID: 0,
+			},
+			testUtils.SubscribeToCollection{
+				NodeID:        1,
+				CollectionIDs: []int{0},
+			},
+			testUtils.CreateDoc{
+				NodeID: immutable.Some(0),
+				Doc: `{
+					"name": "John",
+					"age": 21
+				}`,
+				IsEncrypted: true,
+			},
+			testUtils.WaitForSync{},
+			testUtils.Request{
+				NodeID: immutable.Some(1),
+				Request: `
+					query {
+						commits {
+							cid
+							collectionID
+							delta
+							docID
+							fieldId
+							fieldName
+							height
+							links {
+								cid
+								name
+							}
+						}
+					}
+				`,
+				Results: []map[string]any{
+					{
+						"cid":          "bafyreih7ry7ef26xn3lm2rhxusf2rbgyvl535tltrt6ehpwtvdnhlmptiu",
+						"collectionID": int64(1),
+						"delta":        encrypt(testUtils.CBORValue(21)),
+						"docID":        "bae-c9fb0fa4-1195-589c-aa54-e68333fb90b3",
+						"fieldId":      "1",
+						"fieldName":    "age",
+						"height":       int64(1),
+						"links":        []map[string]any{},
+					},
+					{
+						"cid":          "bafyreifusejlwidaqswasct37eorazlfix6vyyn5af42pmjvktilzj5cty",
+						"collectionID": int64(1),
+						"delta":        encrypt(testUtils.CBORValue("John")),
+						"docID":        "bae-c9fb0fa4-1195-589c-aa54-e68333fb90b3",
+						"fieldId":      "2",
+						"fieldName":    "name",
+						"height":       int64(1),
+						"links":        []map[string]any{},
+					},
+					{
+						"cid":          "bafyreicvxlfxeqghmc3gy56rp5rzfejnbng4nu77x5e3wjinfydl6wvycq",
+						"collectionID": int64(1),
+						"delta":        nil,
+						"docID":        "bae-c9fb0fa4-1195-589c-aa54-e68333fb90b3",
+						"fieldId":      "C",
+						"fieldName":    nil,
+						"height":       int64(1),
+						"links": []map[string]any{
+							{
+								"cid":  "bafyreifusejlwidaqswasct37eorazlfix6vyyn5af42pmjvktilzj5cty",
+								"name": "name",
+							},
+							{
+								"cid":  "bafyreih7ry7ef26xn3lm2rhxusf2rbgyvl535tltrt6ehpwtvdnhlmptiu",
+								"name": "age",
+							},
+						},
+					},
+				},
+			},
+		},
+	}
+
+	testUtils.ExecuteTestCase(t, test)
+}