Is it possible to use the encryption MD5 or other for database password with FME 2011? Link
You can ENCODE the workspace itself.
Q) How secure is a password protected workspace?
A) We've taken efforts to make them as secure as possible to casual scrutiny. For example, there's no use anyone trying the FME_DEBUG keyword with the MAPPING_FILE option because we've made it invalid on protected content. I tried a number of ways to view a protected workspace in a text editor, or otherwise access the content, and couldn't.
However - we won't guarantee absolute security. We encode files, but we don't encrypt them; so it isn't like your local security agency of choice couldn't read them in ten seconds if you're thinking of creating a custom transformer such as 'DirtyMoneyLaunderer'!
As with all IT systems you can help security by...
Choosing a non-obvious password (ie not your name, your initials, your company name, "FME", "password", "pa$$word" etc) Choosing a longer password (in general longer passwords are more secure)