Stored: nowhere. The "encryption" vim does is a very simple symmetric one. Try and enter a wrong key, vim won't notice the difference. Also, there isn't really that much safety involved. From :help :X
Quote:
The algorithm used is breakable. A 4 character key in about one hour, a 6 character key in one day (on a Pentium 133 PC). This requires that you know some text that must appear in the file. An expert can break it for any key. When the text has been decrypted, this also means that the key can be revealed, and other files encrypted with the same key can be decrypted.
If you want protection against more than accidental reading, use gpg instead.
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Specifically, it's a kind of
OFB using
xor "encryption".
VIM: Encryption key.