I thought this practice had lost its appeal. Guess not. I've always hated this approach, but if it works, I suppose it will never go out of fashion. 

When I seen any sort of challenge/response email, it is added to my block list.

As you mention, this is terrible for receiving transactional emails like invoices, account notifications etc, which generally use un monitored mailboxes, so if you are a business, this can be problematic and frustrating to manage.

Ive just come from Rackspace over to SmarterMail and one spam function that Rackspace had was that you can block ALL incoming mails, except those on your allowed list, which basically stops everything at the smtp level, again for a business, quite challenging to manage, but say for someone who wants privacy or protect a childs email account, this is a good option. I am not sure if SM has this.

Spammers are sending 100's of thousands of emails a day, so I am not entirely clear whether a challenge email notification is a really good thing for a mail server, imagine a spammer getting your server with 100k spams, this is 100k challenge emails that have to go out (which inevitably will involve 100k bounce emails coming back, which involves filtering, smtp usage, processing etc. My theory is that it creates more problems than solutions.