Chinese regulators have banned financial institutions from using Bitcoin, warning that the virtual currency could be used for illegal activities and speculation. China's central bank, the People's Bank of China, announced the decision in a statement released Thursday, though it stopped short of banning Bitcoin altogether. Individuals are still free to use the digital currency in China, albeit at their own risk. Bitcoin prices fell in response to today's announcement, dropping to as low as $970.62 on Thursday after trading at over $1,100 prior to the central bank's decision.

Bitcoin has seen its popularity soar in China, with its value recently surpassing $1,000 on BitStamp, an online exchange. Earlier this week, Bloomberg reported that BTC China, the country's largest Bitcoin exchange, has been in low-level discussions with Chinese regulators about officially recognizing the currency and allowing it to be used for purchasing goods and services. In a November 29th interview, BTC China CEO Bobby Lee told Bloomberg that in China, Bitcoin is "not on the black list and it's not on the white list. It's in the gray area." Speaking to Bloomberg ahead of today's announcement, Lee said recognizing and regulating the currency would help ensure that it's used for goods and services, rather than currency speculation.

Regulators are wary of laundering and speculation

China has long implemented tight currency controls, so it's not surprising that regulators would be wary of Bitcoin, which has yet to be regulated in any country. In its statement, the central bank said it would closely monitor the risks that Bitcoin poses, adding that it would take measures to prevent the currency from being laundered for illicit activities.

"As Bitcoin transactions can be done anonymously and are not restricted by location, it's difficult to monitor capital flows and it therefore facilitates money laundering and financing for terrorist activities," the People's Bank of China said.

"There have been criminal activities using Bitcoins, such as trading of drugs and guns," the bank added. "Relevant cases are under investigation."