New Bitcoin proposal rescues locked multisig wallets – At a hidden cost

Bitcoin's BIP138 wallet-backup proposal was merged into the Bitcoin Improvement Proposals repository on Sept. 21, but the specification remains Draft. It aims to preserve information that a seed phrase may not restore in a complex wallet. The tradeoff is that a third party could read that information if it already holds an eligible extended public key, or xpub, and obtains a copy of the encrypted backup.

A multisignature wallet requires more than one signer. Its descriptor records the public keys and spending rules that tell wallet software how to reconstruct the account and find its coins. A seed phrase can regenerate one signer's private keys, but losing the descriptor can still leave a multisig or miniscript script impossible to reconstruct from that seed alone.

The proposal describes another failure: a wallet designed to survive the loss of one seed may also lose that signer's public key. The remaining signers can then lack a piece of the script needed to recover the coins. These are risks for wallets whose spending setup depends on information beyond a seed, not a claim that every Bitcoin wallet needs this backup.

BIP138's answer is an encrypted file holding descriptors, wallet policies or other non-seed metadata. Private key material must be removed before encryption. A holder of an eligible xpub from the backed-up wallet can decrypt a copy without the wallet's seed. That reveals public keys and script structure needed for recovery, while the xpub alone does not give the holder the private keys required to sign.