The value of bitcoins, the volatile virtual currency that has soared in recent months and made fortunes for some, has plunged after China banned its banks from providing related services and products.
China has become the biggest bitcoin market in recent months as buyers seek to profit from speculating in the currency.
Prices on BTC China, the country's biggest bitcoin trading platform -- which had stood at more than 7,000 yuan (around $US1,100/$A1,214.33) each -- on Thursday plunged by more than a third to an intra-day low of 4,523.12 yuan.
The drop wiped more than $US5 billion ($A5.52 billion) off the total value of the 12 million-odd Bitcoins currently in circulation.
They later recovered to trade at around 5,700 yuan each.
"Bitcoin is a certain virtual commodity, does not possess the same legal status as currency and cannot and should not be circulated and used in the market as such," the People's Bank of China (central bank) said in a statement issued jointly with other financial regulators.
Chinese banks and other financial organisations are banned from providing bitcoin-related services and products, it said.
It called for enhanced control of online trading platforms for bitcoins to defend against the possibility of money-laundering, and pointed out investment risks faced by the public.
"But ordinary people, under the premise of voluntarily shouldering the risk, have the freedom to participate in bitcoin trading as a kind of buying and selling activity on the internet," it said.
Launched in 2009 as the invention of a mysterious computer guru who goes by the pseudonym Satoshi Nakamoto, bitcoins are digitally created and stored in a virtual wallet, allowing users to remain anonymous.
Concerns have increased internationally over the money amid questions about regulation and the potential for fraud and abuse.
The official Xinhua news agency on Tuesday reported that police in eastern China took three people into custody for allegedly shutting down an online bitcoin trading platform and absconding with the assets of people who invested in it.
France's central bank has warned against the use of bitcoin, noting that it is not only highly volatile but also unregulated by authorities.
Bitcoin has gained popularity in recent weeks after US regulators, including Federal Reserve Chairman Ben Bernanke, took a more positive view of the currency than many analysts had expected at a congressional hearing last month.
But the Bank of France is sceptical about the currency, and underlined that the "highly speculative" currency poses a "certain financial risk" to users.
"Even if the high volatility of the bitcoin is of possible interest for individual or professional speculators, they should be aware of the risks they are taking," the bank said.
Bitcoin broke above $US1000 ($A1104) per unit last week, quintupling in a month, according to Mt.Gox exchange which manages trading in the currency.
Beyond its volatility, the bank also warned that the currency is not backed up by any real economic activity.
In addition, there are no official security guarantees for the electronic safes which store the virtual currency, making the user vulnerable to cyber attacks.
Further, the convertibility of bitcoin is not ensured and an investor could be unable to regain his investment.
The central bank noted that if a currency is to be used as a mode of payment, it should meet rules against money laundering, and its security platform should be monitored by the Bank of France.
Nevertheless, the bank has no oversight of bitcoin, and urged instead for action to prevent the virtual currency from being used in illegal transactions.
Bitcoins recently made headlines when the US Federal Bureau of Investigation closed the Silk Road website where illegal drugs, forged documents, hacker tools and even the services of hitmen were hawked with payments made using the virtual currency.
The FBI seized 26,000 bitcoins worth $US3.6 million ($A3.97 million) at the time.