Like the folks say...
If you shell out a lot of dough to Adobe for ColdFusion server-based media encryption service, you can get encrypted digital streams -- but once they've been decrypted by the Flash player, it sends the digital information through the OS where it can still be intercepted legally. (Adobe has made some noise on that, I think, but it appears their theory neglected the fact that the signal has already been decrypted by the time your audio capture software grabs it, making the provisions of the Millennium Copyright Act making decryption illegal apparently moot. If I understand the various legal reasonings involved.)
And, beside, you couldn't afford such encryption, in all likelihood, even if it was a solution.
(And, of course, even if you prevented everything else, they could still make a pretty good copy just recording the analog signal at their end.)
With regard to the notion of making them work for their 'ill-gotten' gains -- even if you don't want to shell for Adobe's ColdFusion/Flash server software, if you've got some server scripting skills, you can use PHP's URL encryption in order to make it impossible [or at least very difficult] for users to backtrack the URLs (mp3, Flash, or otherwise) to their location on the server (such backtracking making a straight DL more or less trivial; and that URL can then be posted by miscreants who want to help the less clever to gain unauthorized DLs). Of course, even if you prevent them from backtracking or use Adobe's Flash stream encryption, they can still just capture the analog audio at their end, getting a reasonably good copy and putting it in any format they wish.