The South Korean Government has flagged a ban on cryptocurrency trading, sending bitcoin prices plummeting and throwing the virtual coin market into turmoil.

The clampdown in South Korea, a crucial source of global demand for cryptocurrency, came as policymakers around the world struggled to regulate an asset whose value has skyrocketed over the last year.

"There are great concerns regarding virtual currencies and [the] Justice Ministry is basically preparing a bill to ban cryptocurrency trading through exchanges," Justice Minister Park Sang-ki said in a press conference.

A press official said the proposed ban on cryptocurrency trading was announced after "enough discussion" with other government agencies, including the nation's finance ministry and financial regulators.

Once a bill is drafted, legislation for an outright ban of virtual coin trading would require a majority vote of the total 297 members of the National Assembly, a process that could take months or even years.

The Government's tough stance triggered a selloff of the cryptocurrency on both local and offshore exchanges.

The local price of bitcoin plunged as much as 21 per cent in midday trade to 18.3 million won ($21,700) after the minister's comments.

It still trades at around a 30 per cent premium compared to other countries.

Bitcoin was down more than 10 per cent on the Luxembourg-based Bitstamp at $US13,199 ($16,762), after earlier dropping as low as $13,120 ($16,658), its weakest since January 2.

Once enforced, South Korea's ban "will make trading difficult here, but not impossible," said Mun Chong-hyun, chief analyst at EST Security.

"Keen traders, especially hackers, will find it tough to cash out their gains from virtual coin investments in Korea but they can go overseas, for example Japan," Mr Mun said.

Park Nok-sun, a cryptocurrency analyst at NH Investment & Securities, said the herd behaviour in South Korea's virtual coin market had raised concerns.

Indeed, bitcoin's 1,500 per cent surge last year has stoked huge demand for cryptocurrency in South Korea, drawing college students to housewives and sparking worries of a gambling addiction.

"Some officials are pushing for stronger and stronger regulations because they only see more [investors] jumping in, not out," Mr Park said.

By Thursday afternoon, the Justice Ministry's announcement had prompted more than 55,000 South Koreans to join a petition asking the presidential Blue House to halt the crackdown on the virtual currency, making the Blue House website intermittently unavailable due to heavy traffic.

Reuters