When a txn. is made on blockchain, it can be viewed by anyone, so anyone can see the password from the argument of the function call.
Anyone can see the user's set password
Other people can exploit the user by getting access to user's accounts.
Manual Review
To encrypt the password with the user's public key, so that only the user can decrypt it with their private key.
Private functions and state variables are only visible for the contract they are defined in and not in derived contracts. In this case private doesn't mean secret/confidential
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