Bitcoin down 29% as China bans banks from trade

The Chinese government has taken a hard line against bitcoin, announcing Thursday it is banning its banks from trading in the virtual currency.

The People’s Bank of China is also forbidding local financial institutions to provide any kind of bitcoin-related business such as deposits, custody services or collateral business.

Prices for the currency fell 29% on the news, as Chinese appetite for bitcoins has been one of the main drivers of its 5,000% appreciation this year.

The crypto-currency was trading at around $1,225 this morning on the Mt.Gox exchange, but dropped more than $350 to a low of $870 after the announcement.

Based on today’s ruling, Chinese banks will also be barred from offering insurance services to bitcoin-related business or issuing trust and fund products invested in the virtual currency.

China’s central bank said bitcoins did not qualify as a currency, but private individuals still are allowed to trade them at their own risk.

“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,” said the bank in a statement also signed by the Ministry of Industry and Information Technology, the China Banking Regulatory Commission and the China Securities Regulatory Commission, and China Insurance Regulatory Commission.

About a third of global bitcoin transactions this year have taken place in China, which made Shanghai-based BTCChina the world’s biggest bitcoin exchange by trading volume last month.

Image by Zach Copley via Flickr.