The latest twist in the Bitcoin saga is a real shocker. Late last month it emerged that 744,000 Bitcoins (worth about £250 million) had apparently been stolen from ‘Mt. Gox’ – which, until recently, was the electronic currency’s largest exchange.

This is not an isolated example, Bitcoins have been stolen from other service providers too. Only this week came news of yet another theft – after hackers reportedly made off with £365,000 worth of Bitcoins from an online bank called Flexcoin.

The fact that holdings of the electronic currency appear so vulnerable to theft might be cause for wider alarm. After all, isn’t it the case that holdings of conventional currencies are also mostly electronic in form – including our bank accounts?

Indeed it is, but as James Kwak explains in the Atlantic there is a big difference between Bitcoin and boring old pounds and dollars:

“Yes, most of the money that we have also depends on software. Your bank, for example, keeps track of the value of your account on a computer. But your money doesn’t depend entirely on software. It’s also backed by a trail of transaction information (backed up in multiple places), by the law, by the Federal Reserve, and by the U.S. government, which would not tolerate the sudden evaporation of every American’s bank account.”

A conventional computerised bank account contains information about your money, but with Bitcoin the information is your money – so if hackers gain access to that, then the money is gone without hope of recovery.

In some respects crypto-currencies are like how money used to be. Unlike conventional fiat currencies, Bitcoins resemble gold coins in that they can’t just be printed into existence by irresponsible governments. They also make it very hard for the authorities to monitor transactions. However, this untraceability also facilitates theft.

In theory, crypto-currency systems can be designed to create the electronic equivalent of a strong room – but in practice invulnerability cannot be guaranteed:

“Part of the underlying problem is an unwritten law of software competition: Security, performance, and reliability all cost money, but features are cheap and popular. So in the short term, it’s a rational strategy to race ahead with feature development, skimp on security, and hope that you don’t get caught with your pants down…

“More generally, there is no such thing as a technological utopia. No matter how perfect a technological concept is, when it enters the world of human beings, it becomes imperfect…”

Of course, no one has to has to use Bitcoin – or any part of the array of electronic banks and exchanges that make up the overall system. Indeed, it can be seen as a completely free market in which there is no hand-holding by regulators and no government bail-outs, only a ruthlessly competitive process of trial and error in which the most efficient and reliable services are bound to win out… eventually.

There are those on the right who believe this is how the entire financial sector should work – and that, in the wake of the Credit Crunch and the Eurozone crisis, insolvent banks should have been allowed to collapse. Ignoring, for one moment, the macroeconomic consequences of such a policy, is there anything to be said for it?

On the one hand it would certainly encourage greater caution on the part of bankers and investors, but on the other there’s the millions of ordinary pensioners, savers and depositors who’d run the risk of losing everything.

Most people, including most free marketeers, would recognise that markets can only exist within a framework of law. However, the role of government isn’t just to facilitate the legal contracts on which markets depend, it is also there to uphold certain social contracts. One of the most important of these is that in return for doing the right thing by saving money and making provision for the future, ordinary citizens shouldn’t be ruined by the mistakes of the money men.

Obviously, there are many options for regulating the financial sector, some much better than others. But we should be grateful to Bitcoin for showing us what a world of no financial regulation would look like.