When encryption is being used, every time Copernicus loads the user file, it will prompt for a password to encrypt/decrypt the file. Certain actions also require confirmation of the password (such as exporting the passwords to an new file).
It is very important to note that should you forget the password used to encrypt your Copernicus user file then unless you are able to break encryption your DATA WILL BE LOST! There is NO way to recover lost passwords as it is never stored in plain text.
The default encryption plugin is a weak grade encryption designed to hide your passwords from a casual curious user of your computer. It would not stand up to a brute force attack by a cracker. Copernicus supports third party plugins so it would be possible to encrypt the file using very strong encryption such as PGP.
If you wish to hide your passwords but don't want to use the encryption, one option is to discuise your passwords in plain site. Substitute your password for a common word to represent it eg. (main-pass). If on one site you need to append a '1' to it, then that can be stored as (main-pass)1.