diff --git a/src/Commands/SecretsSetup.php b/src/Commands/SecretsSetup.php
index a027ef1..bdf2dbc 100644
--- a/src/Commands/SecretsSetup.php
+++ b/src/Commands/SecretsSetup.php
@@ -56,11 +56,15 @@ protected function configure(): void
             With an argument, stores the provided key on this node.
             Example: protocol secrets:setup "your-hex-key-here"
 
+            The storage location is determined by the environment set via
+            config:env. Production environments store the key globally in
+            protocol's .node/key. All other environments (local, dev, staging)
+            store the key per-project in the current working directory's
+            .protocol/key.
+
             The key is also read automatically from the PROTOCOL_ENCRYPTION_KEY
             environment variable, so CI/CD workflows can pass it from GitHub secrets.
 
-            The key is stored at ~/.protocol/.node/key with 0600 permissions.
-
             HELP)
         ;
         $this
@@ -86,8 +90,12 @@ protected function execute(InputInterface $input, OutputInterface $output): int
             }
         }
 
+        $keyPath = Secrets::keyPath();
+        $scope = Secrets::isGlobal() ? 'global' : 'project';
+        $output->writeln("<comment>Environment scope: {$scope}</comment>");
+
         if (Secrets::hasKey() && !$providedKey) {
-            $output->writeln('<comment>Encryption key already exists at: ' . Secrets::keyPath() . '</comment>');
+            $output->writeln('<comment>Encryption key already exists at: ' . $keyPath . '</comment>');
             $output->writeln('To replace it, delete the existing key first.');
             return Command::SUCCESS;
         }
@@ -101,7 +109,7 @@ protected function execute(InputInterface $input, OutputInterface $output): int
             }
 
             if (Secrets::storeKey($providedKey)) {
-                $output->writeln('<info>Encryption key stored at: ' . Secrets::keyPath() . '</info>');
+                $output->writeln('<info>Encryption key stored at: ' . $keyPath . '</info>');
             } else {
                 $output->writeln('<error>Failed to store encryption key.</error>');
                 return Command::FAILURE;
@@ -117,7 +125,7 @@ protected function execute(InputInterface $input, OutputInterface $output): int
                 $output->writeln('<comment>Copy this key to other nodes:</comment>');
                 $output->writeln("  protocol secrets:setup \"{$hexKey}\"");
                 $output->writeln('');
-                $output->writeln('Stored at: ' . Secrets::keyPath());
+                $output->writeln('Stored at: ' . $keyPath);
             } else {
                 $output->writeln('<error>Failed to generate encryption key.</error>');
                 return Command::FAILURE;
diff --git a/src/Helpers/Secrets.php b/src/Helpers/Secrets.php
index 8fbd4ae..b0f837c 100644
--- a/src/Helpers/Secrets.php
+++ b/src/Helpers/Secrets.php
@@ -11,12 +11,33 @@ class Secrets
     const NONCE_LENGTH = 12;
     const TAG_LENGTH = 16;
 
+    /**
+     * Determine whether secrets should be stored globally (production)
+     * or per-project (all other environments).
+     */
+    public static function isGlobal(): bool
+    {
+        return !IncidentDetector::isDev();
+    }
+
+    /**
+     * Path to the project-local .protocol directory.
+     */
+    public static function projectDataDir(): string
+    {
+        return WORKING_DIR . '.protocol' . DIRECTORY_SEPARATOR;
+    }
+
     /**
      * Path to the encryption key file.
+     * Production stores globally in NODE_DATA_DIR, all other envs store per-project.
      */
     public static function keyPath(): string
     {
-        return NODE_DATA_DIR . 'key';
+        if (self::isGlobal()) {
+            return NODE_DATA_DIR . 'key';
+        }
+        return self::projectDataDir() . 'key';
     }
 
     /**
@@ -37,17 +58,24 @@ public static function generateKey(): string
 
     /**
      * Store the encryption key to disk.
+     * Location is determined by the current environment (config:env).
      */
     public static function storeKey(string $hexKey): bool
     {
-        $dir = dirname(self::keyPath());
+        $path = self::keyPath();
+        $dir = dirname($path);
         if (!is_dir($dir)) {
             mkdir($dir, 0700, true);
         }
-        $written = file_put_contents(self::keyPath(), $hexKey);
+        $written = file_put_contents($path, $hexKey);
         if ($written !== false) {
-            chmod(self::keyPath(), 0600);
+            chmod($path, 0600);
+        }
+
+        if (!self::isGlobal()) {
+            self::ensureGitignore();
         }
+
         return $written !== false;
     }
 
@@ -167,4 +195,27 @@ public static function decryptToTempFile(string $inputPath): ?string
         chmod($tmpFile, 0600);
         return $tmpFile;
     }
+
+    /**
+     * Ensure .protocol/ is listed in the project's .gitignore.
+     */
+    public static function ensureGitignore(): void
+    {
+        $gitignorePath = WORKING_DIR . '.gitignore';
+        $entry = '.protocol/';
+
+        if (is_file($gitignorePath)) {
+            $contents = file_get_contents($gitignorePath);
+            // Check if already present (exact line match)
+            $lines = array_map('trim', explode("\n", $contents));
+            if (in_array($entry, $lines)) {
+                return;
+            }
+            // Append with a newline if file doesn't end with one
+            $append = (substr($contents, -1) === "\n" ? '' : "\n") . $entry . "\n";
+            file_put_contents($gitignorePath, $contents . $append);
+        } else {
+            file_put_contents($gitignorePath, $entry . "\n");
+        }
+    }
 }