Way to run SQLCMD without storing password in text format
If you are using SQL Logins, then basically, no.  You'll want to have sqlcmd use the person's domain login to connect to the SQL Instance (the -E parameter instead of -U and -P).  You can use a login trigger to ensure that they are only able to connect via sqlcmd if you want to prevent them from logging in via SQL Server management studio (it isn't a perfect fix, but it'll stop 99% of people).