You can implement all the encryption/authentication at the application layer, depending on your use case. USB can stay as-is.

In theory sniffing attacks can extend to anything. The basic problem is that: 1) All electronics create EMI. 2) We have very cheap ways to measure EMI with high sensitivity.

The brute force solution is to faraday cage everything, but even then something leaks out and it is just a matter of time before more sensitive equipment is available at low cost.