diff --git a/go.mod b/go.mod
index d013b6d76..1502026b6 100644
--- a/go.mod
+++ b/go.mod
@@ -9,7 +9,7 @@ require (
 	github.com/btcsuite/btclog v0.0.0-20170628155309-84c8d2346e9f
 	github.com/btcsuite/btcutil v1.0.3-0.20210527170813-e2ba6805a890
 	github.com/btcsuite/btcutil/psbt v1.0.3-0.20210527170813-e2ba6805a890
-	github.com/btcsuite/btcwallet v0.12.1-0.20210826004415-4ef582f76b02
+	github.com/btcsuite/btcwallet v0.12.1-0.20210916213031-d0868cb9dd94
 	github.com/btcsuite/btcwallet/wallet/txauthor v1.1.0
 	github.com/btcsuite/btcwallet/wallet/txrules v1.1.0
 	github.com/btcsuite/btcwallet/wallet/txsizes v1.1.0 // indirect
diff --git a/go.sum b/go.sum
index e71a5fc92..6ad1c41df 100644
--- a/go.sum
+++ b/go.sum
@@ -91,8 +91,8 @@ github.com/btcsuite/btcutil v1.0.3-0.20210527170813-e2ba6805a890/go.mod h1:0DVlH
 github.com/btcsuite/btcutil/psbt v1.0.3-0.20201208143702-a53e38424cce/go.mod h1:LVveMu4VaNSkIRTZu2+ut0HDBRuYjqGocxDMNS1KuGQ=
 github.com/btcsuite/btcutil/psbt v1.0.3-0.20210527170813-e2ba6805a890 h1:0xUNvvwJ7RjzBs4nCF+YrK28S5P/b4uHkpPxY1ovGY4=
 github.com/btcsuite/btcutil/psbt v1.0.3-0.20210527170813-e2ba6805a890/go.mod h1:LVveMu4VaNSkIRTZu2+ut0HDBRuYjqGocxDMNS1KuGQ=
-github.com/btcsuite/btcwallet v0.12.1-0.20210826004415-4ef582f76b02 h1:Q8Scm1SXNRyiXzD3a7O1C6bLFIUxUQSnWAd9aat8Xd0=
-github.com/btcsuite/btcwallet v0.12.1-0.20210826004415-4ef582f76b02/go.mod h1:SdqXKJoEEi5LJq6zU67PcKiyqF97AcUOfBfyQHC7rqQ=
+github.com/btcsuite/btcwallet v0.12.1-0.20210916213031-d0868cb9dd94 h1:Bx+xu606h2sZNn5VaZMWvI0GtlGE+y+dHI4hbL5Ld6k=
+github.com/btcsuite/btcwallet v0.12.1-0.20210916213031-d0868cb9dd94/go.mod h1:gHFk6GQ4IP/a8z6mfwK85GagUPxvAxCmgFy/whrBXhI=
 github.com/btcsuite/btcwallet/wallet/txauthor v1.0.0/go.mod h1:VufDts7bd/zs3GV13f/lXc/0lXrPnvxD/NvmpG/FEKU=
 github.com/btcsuite/btcwallet/wallet/txauthor v1.0.1-0.20210329233242-e0607006dce6/go.mod h1:VufDts7bd/zs3GV13f/lXc/0lXrPnvxD/NvmpG/FEKU=
 github.com/btcsuite/btcwallet/wallet/txauthor v1.1.0 h1:8pO0pvPX1rFRfRiol4oV6kX7dY5y4chPwhfVwUfvwtk=
diff --git a/keychain/btcwallet.go b/keychain/btcwallet.go
index 79260ec94..65c23b78b 100644
--- a/keychain/btcwallet.go
+++ b/keychain/btcwallet.go
@@ -93,7 +93,7 @@ func (b *BtcWalletKeyRing) keyScope() (*waddrmgr.ScopedKeyManager, error) {
 
 	// Otherwise, we'll first do a check to ensure that the root manager
 	// isn't locked, as otherwise we won't be able to *use* the scope.
-	if b.wallet.Manager.IsLocked() {
+	if !b.wallet.Manager.WatchOnly() && b.wallet.Manager.IsLocked() {
 		return nil, fmt.Errorf("cannot create BtcWalletKeyRing with " +
 			"locked waddrmgr.Manager")
 	}
@@ -216,10 +216,16 @@ func (b *BtcWalletKeyRing) DeriveKey(keyLoc KeyLocator) (KeyDescriptor, error) {
 
 		// If the account doesn't exist, then we may need to create it
 		// for the first time in order to derive the keys that we
-		// require.
-		err = b.createAccountIfNotExists(addrmgrNs, keyLoc.Family, scope)
-		if err != nil {
-			return err
+		// require. We skip this if we're using a remote signer in which
+		// case we _need_ to create all accounts when creating the
+		// wallet, so it must exist now.
+		if !b.wallet.Manager.WatchOnly() {
+			err = b.createAccountIfNotExists(
+				addrmgrNs, keyLoc.Family, scope,
+			)
+			if err != nil {
+				return err
+			}
 		}
 
 		path := waddrmgr.DerivationPath{
@@ -280,12 +286,16 @@ func (b *BtcWalletKeyRing) DerivePrivKey(keyDesc KeyDescriptor) (
 
 		// If the account doesn't exist, then we may need to create it
 		// for the first time in order to derive the keys that we
-		// require.
-		err = b.createAccountIfNotExists(
-			addrmgrNs, keyDesc.Family, scope,
-		)
-		if err != nil {
-			return err
+		// require. We skip this if we're using a remote signer in which
+		// case we _need_ to create all accounts when creating the
+		// wallet, so it must exist now.
+		if !b.wallet.Manager.WatchOnly() {
+			err = b.createAccountIfNotExists(
+				addrmgrNs, keyDesc.Family, scope,
+			)
+			if err != nil {
+				return err
+			}
 		}
 
 		// If the public key isn't set or they have a non-zero index,
diff --git a/lnwallet/btcwallet/btcwallet.go b/lnwallet/btcwallet/btcwallet.go
index 1db9e0b18..0dd38da04 100644
--- a/lnwallet/btcwallet/btcwallet.go
+++ b/lnwallet/btcwallet/btcwallet.go
@@ -291,10 +291,14 @@ func (b *BtcWallet) Start() error {
 	// We'll start by unlocking the wallet and ensuring that the KeyScope:
 	// (1017, 1) exists within the internal waddrmgr. We'll need this in
 	// order to properly generate the keys required for signing various
-	// contracts.
-	if err := b.wallet.Unlock(b.cfg.PrivatePass, nil); err != nil {
-		return err
+	// contracts. If this is a watch-only wallet, we don't have any private
+	// keys and therefore unlocking is not necessary.
+	if !b.cfg.WatchOnly {
+		if err := b.wallet.Unlock(b.cfg.PrivatePass, nil); err != nil {
+			return err
+		}
 	}
+
 	_, err := b.wallet.Manager.FetchScopedKeyManager(b.chainKeyScope)
 	if err != nil {
 		// If the scope hasn't yet been created (it wouldn't been
diff --git a/lnwallet/btcwallet/config.go b/lnwallet/btcwallet/config.go
index a69217ead..f97f2943f 100644
--- a/lnwallet/btcwallet/config.go
+++ b/lnwallet/btcwallet/config.go
@@ -72,6 +72,10 @@ type Config struct {
 	// CoinSelectionStrategy is the strategy that is used for selecting
 	// coins when funding a transaction.
 	CoinSelectionStrategy wallet.CoinSelectionStrategy
+
+	// WatchOnly indicates that the wallet was initialized with public key
+	// material only and does not contain any private keys.
+	WatchOnly bool
 }
 
 // NetworkDir returns the directory name of a network directory to hold wallet