In science fiction, aliens, vampires and zombies often threaten sovereignty. In real life -- with currency and the ability to create it, control it, dispense it, and regulate it being at the very core of sovereign power – Bitcoin and other virtual currencies, if unchecked, could be that existential threat.

Every sovereignty uses currency. With it, commerce is transacted, fortunes are made or lost and taxes are paid. Even the word “sovereign” denotes money, the first of which were gold coins minted in 1489 by King Henry VII. The bond between a sovereign and its currency is inseparable. Wars have been fought over the pursuit of it and the right to control it. In the U.S., the power to mint coin and regulate its value is set in the U.S. Constitution. The E Pluribus Unum (“Out of Many, One”) -- affixed to the Great Seal of the United States since 1782 and printed on U.S. currency -- extols this duty. Trust and faith that a sovereign is firmly standing behind its currency is critical.

Sovereigns understand that without consistent economic growth and stability, the standard of living for its citizens will fall, and discontentment will grow. Nation-state treasuries print currency but the vital role of currency management-- needed to spur economic growth -- is reserved for central bankers. These financial stewards have immense power and responsibility. The Federal Reserve Bank gained this authority from Congress in 1913, but central bank-sovereign history spans over 340 years. The first central bank was established in Sweden in 1668 followed by England in 1694.

If not controlled and tightly regulated, Bitcoin -- a decentralized, untraceable, highly volatile and nationless currency -- has the potential to undermine this longstanding bond between sovereign and its currency. Disrupting this link would impact monetary policy and well-established currencies. If Bitcoin is allowed to flow freely through the global capital markets, in its current embryonic state, it could harm nations, economies and global commerce.

Under the Bitcoin model, those who create the software protocol and mine virtual currencies would become the new central bankers, controlling a monetary base. Their decisions would directly impact the Bitcoin economy and spillover to well-established currencies. Confidence in virtual currencies could quickly evaporate if a sudden price drop, cyber-attack or other market disruptions occurred. If citizens increasingly began to use virtual currencies over home currency, the sovereign money base would decline, hampering the ability to fully perform beneficial monetary duties. Stability and confidence in home currency also could be eroded.

Excluding Bitcoin, there now are some eighty other globally traded virtual currencies with more coming online each day (http://coinmarketcap.com/mineable.html). Bitcoin is the bellwether of the industry, representing over 90 percent of stated market value. Therefore, the success or failure of Bitcoin directly impacts the growth prospects of other virtual currencies.

Compared to fiat currency, virtual currency has several distinct weaknesses. As proven recently, it is more susceptible to destabilizing cyber-attacks, weak exchange controls, market illiquidity, asset bubbles and sudden price swings that could destroy investor confidence and wealth, triggering cascading economic damage. Since inception, Bitcoin has adhered to an anti-regulation and anti-Fed doctrine. This approach has proven the Achilles heel, creating greater opportunity for market manipulation and fraud, leaving no room for consumer protection.

A week in Bitcoin world is like a decade in other markets. Up until recently, Bitcoiners pointed to open source code and five years of existence as proof that software was failsafe. However, in recent days cyber hackers proved otherwise by cracking the code, exploiting a software flaw, triggering a chain reaction, forcing three of the largest exchanges -- representing over seventy percent of all trading volume -- to halt investor withdrawals. During the 2013 Bitcoin Bubble, these exchanges proved adept at taking in hard currency and turning it into e-currency. But when markets turned turbulent and software unreliable, exchange weaknesses became evident. Investors quickly learned about Hotel California Risk-- you can check out anytime you like but you can never leave -- and converting Bitcoin to hard currency became virtually impossible. Recent market events are instructive. The speed, in which hackers disrupted global trading, and the level of damage, further illustrates the fragility of the entire Bitcoin infrastructure. Self-regulation allowed this multibillion-dollar industry to be built on clay feet.

Prices remain volatile and market illiquidity high. The Bitcoin cyber-attack debacle triggered a brief flash crash, knocking prices down to $102 before settling back at $600. Remarkably, it only took a minuscule 6000 block trade to inflict this extensive damage. Since the market peak in December 2013, prices have nearly halved. If Bitcoin currency and infrastructure are unstable, it is increasingly dangerous to subject the global economy to such market risk uncertainty. The longer the virtual currency economy is allowed to grow unchecked, the greater the chance of adverse economic impact.

Bitcoin flash crash on Feb. 10, 2014. It was an 80% price drop in seconds. via Zerohedge

In reality, Bitcoiners are not central bankers but high-risk commodity traders. To suggest they can do the equivalent work of dedicated and experienced central bankers is farcical. Bitcoin has used a grossly oversimplified fixed-supply formula in an attempt to address panoply of complex, interconnected and ever changing economic variables.

Naively, the Bitcoin approach uses a preset supply formula fixed in 2009 when the first coin-block was generated. Once the supply ceiling has been reached in 2140, no new currency will be produced. This dogmatic approach is completely decoupled from present or future economic cycles and lacks the needed flexibility to respond to changing economic conditions. Regardless of a strong or weak economy, a preset amount of Bitcoins will be generated. Such artificial constraints can act as a straight-jacket, retarding an otherwise growing economy. Complicating monetary matters, Bitcoin owners practice extreme hoarding. Over 90 percent of all Bitcoins are retained, leaving only a small portion available to facilitate trading, market liquidity and commerce.

In a robust economy, banks lend and consumers spend. If money supply is hoarded, the economy -- as measured in GDP and standard of living -- will shrink and incentives to barter will increase. Bitcoin fixed-supply formula has one major fatal flaw; it fails to acknowledge that human behavior, not mathematical formulas, drives markets. Until human behavior can be modeled, predetermined formulas can’t replace the crucial judgment role played by central bankers around the globe. Regulators failed to prevent the financial crisis, but the commendable post-crash performance of former Fed Chairman Ben Bernanke demonstrates the importance of strong, flexible and responsive policy action. Such actions cannot be simply preprogrammed.

Responding to Bitcoin risk, many countries including China, Iceland, Russia, Thailand and India have already spoken out against the dangers of virtual currencies, deeming it illegal. Canada also announced it is in the process of tightening its rules. However, other influential countries --- including the U.S., Great Britain and Germany --- have not done enough to address this growing risk. Much more work on a nation-by-nation and global basis needs to be completed.

The immense value of sovereign and monetary unity cannot be ignored. In determining whether to give legitimacy to nationless currencies, risk-benefit analysis needs to flush out the potential impact on nations’ currencies, monetary policies, risks of cybercrime, market manipulation, consumer fraud, price instability, bubble risk, global commerce and the possible broader systemic-risk implications.

In its short experimental history, Bitcoin is better known as the designer-currency-of-choice for money laundering, tax evasion and other unlawful acts, than as a failsafe financial innovation that will improve the global financial markets.

Recent market events -- including hyper-price instability, market illiquidity, flawed software and the instability of existing trading infrastructure – reveal the possibility that virtual currencies may not be a safe, stable or usable currency. But if analysis can prove Bitcoin offers clear economic and societal benefit, then its use should be regulated and tightly controlled by sovereigns and managed through well-established and tested banking channels. Nations, their regulators and financial protectors have an obligation to ensure that the virtues of Bitcoin and other virtual currencies are utilized, but only if its major flaws are eliminated.

(Williams, a risk-management expert, former Federal Reserve Bank examiner and ex-commodities trading floor senior executive, teaches finance in the Boston University School of Management. In January 2014, he provided testimony before the New York State Department of Financial Services Hearing on Virtual Currencies.)