We discussed this earlier, and after our conversation I decided to dig a bit deeper. It seems that the InputPassword web control is actually part of the EPiServer standard web controls and not part of EPiStore. Information and examples surrounding this control are very scarce - not entirely unusal for EPiServer.
What I have discovered that may be the active ingredient is a method called "Password_PreRender" with the somewhat cryptic description "Used to set the text for the password controls are these are removed for TextBoxes in password mode" (sic) Not quite sure exactly how to implement a working version of this, though. I'll keep digging and report any progress.
If someone knows more about this mysterious web control, feel free to intervene :)
Has their been any more update on this as the new password i set does not work for me either.