Bitcoin Value Falls 20% Following China's Ban Of Trading By Financial Institutions

China banned its financial institutions from trading in Bitcoin on Thursday, which sent the value of the virtual currency, which skyrocketed this year largely due to its popularity in China, down more than 20 percent, before making a slight recovery.

The central bank did not prohibit individual Bitcoin trading, but the new ban, which outlawed financial institutions from trading, underwriting or offering insurance in Bitcoin, could be a sign that the digital currency’s free reign in China is coming to an end, CNN reported on Thursday.

Regulators also said online exchanges will be required to file trading records and to take measures to prevent money laundering risks associated with the virtual currency. While the currency does carry risks, the statement said, it does not yet pose a threat to China’s financial system.

Following a CCTV documentary and Baidu’s announcement that it will accept Bitcoin payments for certain services, the currency’s popularity soared in China, driving prices in Chinese exchanges to dramatic new highs above $1,000 in recent weeks. After the central bank’s announcement, prices on BTC China, the world’s largest exchange by trading volume, fell to about $900.

The government wants to “cool things down a bit,” according to Ron Cao, managing director at Lightspeed China Partners, a venture capital firm that invested $5 million in BTC China in November, the Wall Street Journal reported. The Chinese market “has been too hot, to say the least,” Cao added.

The statement from the central bank “provides a starting point for which a legal framework for Bitcoin can be built,” said Peter Ng, a 33-year-old investment banker who began buying the virtual currency two years ago.

Bitcoin remains unregulated in most parts of the world. In November, a congressional hearing in the U.S. found that there are benefits to digital currencies, and officials are tackling its risks, which prompted another increase in Bitcoin prices, according to the Wall Street Journal. Fed Chairman Ben Bernanke, who did not attend the meeting, said in a letter to senators that virtual currencies “may hold long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system.”

Former Fed Chairman Alan Greenspan, on the other hand, said Bitcoin prices are unsustainably high, and that the virtual money isn’t currency, according to Bloomberg.

BofA Merrill Lynch Global Research released a report on Thurssday assessing the cause and effect of Bitcoin.