Library dbmssocn is being used for connection and we connect to SERVER1 with below string set up in
Registry string key with value name SERVER1 and value key as "DBMSSOCN,,4108"

When we bring up isqlw we can provide username & password which works fine with above string when "net password encryption reqd" is disabled.

After enabling we get error
Msg 1640, Level 16, State 2, Server SERVER1, Line 0
Adaptive Server requires encryption of the login password on the network.
Msg 4002, Level 14, State 1, Server SERVER1, Line 0

Is there any additional Encryption variable we need to set up??