Well I don't know a ton about XM but I know a little bit. As far as I know, nobody is sure exactly how the encryption works. It's implemented in the hardware and works on blocks rather then streams. The keys are dynamic and new keys are sent to the radio periodically to keep it secure. They transmit the new keys over a period of time to make sure everyone gets it.

I got this info out of the new 2600 in an article written by Acidus, if you wanna know more I recommend you check it out.

-gunder