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Apparently, if you want to use Apple Pay, you're required to have a passcode. So I guess you can set up a passcode.
 
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Even if you lose Apple Watch, your accounts are protected. Because when you set up Apple Pay, you’re required to create a passcode. Each time you take Apple Watch off your wrist, the passcode must be entered to access it. And you can quickly remove your cards on iCloud.com.

https://www.apple.com/watch/apple-pay/
 
Somewhere I thought I read that the watch is unlocked automatically the first time a user unlocks their phone (by passcode or touch ID) after they put the watch on. Does anyone know if this is accurate, and will that work for applepay on the watch too? Or do we have to enter an additional passcode on the watch each time?

It sounds like once you unlock the watch (after putting it on) from either the phone or the watch you are good to go. Fingerprint on the phone should unlock both.
 
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