Bitcoin tumbled 29pc this morning as the Chinese government banned its banks from trading in the virtual currency.
The crypto-currency was trading at around $1,225 this morning on the Mt.Gox exchange but fell more than $350 to a low of $870 after the announcement from China.
A sharp rise in interest from China was one of the main driving forces behind the 800 per cent surge in bitcoin's value over the last two months. The world's largest bitcoin exchange, in terms of volume, is now the Shanghai-based BTC China. It has even been adopted as a payment option by China's search engine giant Baidu.
Despite the severity of the reaction, the announcement from China is far from a total ban. The Chinese government says bitcoin is a "virtual product" and forbidden banks from dealing in it, but also effectively given individuals the green light to invest their own money.
“We have clearly stipulated that at the present moment all financial institutions and payment institutions cannot develop any business related to bitcoin,” said the government statement.
“Although there are people calling it a ‘currency’, it is not issued by the monetary authority, it does not possess the attributes of a currency such as legal repayment and enforcement abilities.
“Judged by its nature, bitcoin is one particular kind of a virtual product. It does not have the legal status of a currency, and it cannot and moreover should not be allowed to circulate in the market as a currency.”
The news came in a statement signed by the People's Bank of China, the Ministry of Industry and Information Technology, the China Banking Regulatory Commission and the China Securities Regulatory Commission and China Insurance Regulatory Commission. It has been taken by some analysts as a sign that China will attempt to bring in regulations on private ownership of bitcoin, as it included warnings of future action to prevent money laundering and use by organised crime.
The news was not taken negatively in all quarters. Zennon Kapron, of financial consultancy Kapronasia, told Reuters: "I think it's measured and it's positive. It does add legitimacy to the idea that it could be a nationwide accepted currency."
Ron Cao, managing director at Lightspeed Venture Partners, which recently invested $5 million in BTC China, told Reuters: "This is an industry that will need to be governed or regulated. The safety and the well-being of the common user has to be taken into consideration. All this is expected.
"'We've got a long way to go. This thing needs to be regulated at some point. We're studying it. Don't jump into it.' My read is that's the tone of the message."
As of 1.20pm the price of a single bitcoin had already bounced back into four figures at $1,095.
Chinese authorities also announced today that they have detained three people in relation to the GBL bitcoin exchange, which shut without warning in October, leaving thousands unable to access their money.