Bitcoin Proposal Rescues Locked Wallets but Exposes Hidden Risk

A new Bitcoin proposal aims to rescue locked multisignature wallets by preserving information that seed phrases may not restore. The proposed solution, known as BIP138, involves creating an encrypted backup file containing wallet descriptors and other non-seed metadata.

However, this comes with a hidden cost: a third party can decrypt the backup if they already hold an eligible extended public key (xpub) and obtain a copy of the encrypted file. This could potentially reveal sensitive information about the wallet's configuration and script structure.

The BIP138 proposal attempts to mitigate this risk by excluding certain types of keys from decryption, such as those that appear directly in scripts or xpub roots exposed through spending. Nevertheless, there is still a conditional exposure risk if an account xpub has been disclosed before the multisig wallet was created and reused as a multisig key.

The proposal's merge into the Bitcoin Improvement Proposals repository on September 21 establishes a published draft, but it does not guarantee that existing wallets can create or restore this format. A public Rust implementation with command-line build instructions is available for testing purposes.