Are you seeing something like this when you open the wallet file with a text editor?:
"keystore": {
"seed": "yfA+4QQvOqv8LxpJIs9NroCl+9XY2Z32DxizCGmtW0QmwmdNCHY02BTMeMC+A2wXgwOgSryFToBkM0yBHxF3DD394Q0YBOrI5zj4W+EWpwQDXWf1MFXmi/ScdXIFHvFa",
"type": "bip32",
"xprv": "e2wBpnh3ZwrngS6m8Y3v3ycMlHNX+Ndvs8V7ha3kPkGfLyZSe62A1eLCNEOzs1mRx6loIph6xKMCYsae7c1RqKyYOTdjifm9Ekh3Ql7nTVbEEm71/YwHFE+OM//9BK5CEs2m/6v8pIbPibDVccHCDu7WxgTde2qAa8bAMW+Gv1s=",
"xpub": "xpub661MyMwAqRbcEpcKb4W7YKsRYGDjdjSt1DotBB6GwZoqwmj8cyYpqsQNCvB4uVpooKgHFVmwsfgV58LBT357yLpAMSvy3JrX8SSVaPZN24c"
},
"pruned_txo": {},
"seed_type": "standard",
"seed_version": 16,
"stored_height": 618784,
"transactions": {},
"tx_fees": {},
"txi": {},
"txo": {},
"use_encryption": true,
"verified_tx3": {},
"wallet_type": "standard",
I've opened the wallet file, and can see a string of text under the seed: section. The wallet file also says it is encrypted, even though it is not, as I can read the file. If I set the encryption to false, electrum shows me the long string which is hashed I'm sure, and attempts to change the password with failure of course.
Looks like the answer to my question above is yes?
When you see something like those strings, it means that your wallet file isn't encrypted
but the keys are encrypted (
as you can see above).
When using that kind of wallet, it will only ask for your password whenever you need to access your private keys like signing tx and messages.
You can select that option after you typed the password below the text-boxes in the wallet-creation window or password-creation window.
It's the checkbox: "
Encrypt wallet file", enabled by default.
BTW, I've tried to reproduce your issue by creating a wallet using 3.1.2 then open that wallet file using the latest version. It successfully upgraded.
I suspect that your wallet file was corrupted somehow.