HyperLynx SI needs to be able to read the .subckt line in the SPICE file in order to provide connection nodes in the GUI. If the entire model is encrypted, then HyperLynx can't read it. The way around this is to instantiate the encrypted subcircuit inside another, plain-text subcircuit. Then provide the plain-text subcircuit for HyperLynx to read.
I have tried by defining a new sub circuit and copying the encrypted hex data inside that. The error is gone, and I can do model assignment but it generates multiple errors when simulated like: "Unknown parameter", "Line not consistent with language syntax" and so on. I have also tried instantiating the encrypted subcircuit inside another (but not sure if I am doing it correctly or not). What I understand from this is that Hyperlynx still seems to be unable to decrypt and read the SPICE file.
If the model is encrypted for HSPICE then you must have HSPICE installed and licensed to use that model. Since the goal of encryption is obscuring data, it must be tightly controlled.
This article on Support Center gives more details.