Bitcoin Proposal Seeks to Rescue Locked Multisig Wallets

A new Bitcoin proposal, known as BIP138, has been merged into the Bitcoin Improvement Proposals repository. The proposal aims to rescue locked multisig wallets by preserving information that a seed phrase may not restore in a complex wallet.

The problem with current multisig wallets is that they require more than one signer, and their descriptor records the public keys and spending rules that tell wallet software how to reconstruct the account and find its coins. However, if the descriptor is lost, it can be impossible to reconstruct the wallet from the seed alone.

BIP138 proposes an encrypted file holding descriptors, wallet policies or other non-seed metadata. This file would need to be kept separately from the wallet's private key material. A holder of an eligible xpub from the backed-up wallet could decrypt a copy without the wallet's seed, revealing public keys and script structure needed for recovery.

However, this comes with a privacy warning: if a wallet-service server already knows an account xpub and that same xpub is reused as an eligible multisig key, the server could decrypt the backup if it gets a copy. This would allow the server to learn the wallet metadata inside, although this would not itself give it spending authority.