TLS/SSL will be a requirement soon, with some form of "bearer token" auth scheme. At least for the reference implementation.

The MD5 hash is there to mitigate two issues, currently: some (or most) common users won't pay for a certificate, so instead of sending the password in cleartext, it's hashed as an MD5 to avoid exposure—all of this, of course, is no guarantee against MITM. Which leads us to the second issue: most [non–techie] users re–use their password for a _lot_ of things. At least, if the password is intercepted, it won't be reusable.

It's also worth noting that bcrypt is used server–side to store passwords.

Auth (and very possibly a crypto scheme too) is yet to be tackled. Haven't even decided if it should be part of the spec, or left up to each implementer.