China should maintain its hard line on controlling virtual currencies to prevent wild speculation that may cause major financial losses to investors, according to experts.
Authorities are expected to continue tightening supervision of cryptocurrencies and the financial technology industry this year to prevent the buildup of systemic risks.
On Tuesday, the National Internet Finance Association of China, the China Banking Association and the Payment and Clearing Association of China highlighted the risks of cryptocurrency trading.
The three financial industry associations issued a statement that bans financial and payment institutions from involvement in the cryptocurrency business, in the latest effort to clamp down on speculative trading and price volatility.
Financial institutions, including online payment platforms, should not offer clients any service involving cryptocurrencies such as registration, trading and clearing and settlement, the statement said.
It also forbids institutions from providing savings, trusts or pledging services for cryptocurrencies as well as related financial products.
Bitcoin, the world's largest cryptocurrency by volume, hit a three-month low of $38,514.42 on Wednesday, nearly 40 percent below the peak of $64,829.14 in mid-April, according to CoinDesk, a news site specializing in cryptocurrencies.
An index that measures sentiment in the bitcoin market, the Crypto Fear & Greed Index, has fallen to "extreme fear" levels not seen since April last year, according to a report on Wednesday by Alternative, an international software service provider.
Ethereum, another cryptocurrency, dropped by 5 percent Wednesday to below $3,200. Dogecoin, a cryptocurrency that started as a joke and has been talked up by Tesla CEO Elon Musk, fell 16 percent to $0.4189.
According to BTC126.com, a Chinese fintech information platform, about 234,000 investors suffered large price drops in the cryptocurrency market which led to mandatory liquidations and total loses of about 14 billion yuan ($2.17 billion).
Cheng Shi, chief economist and managing director of ICBC International, said investors are concerned about large fluctuations and the "non-ideal" transaction speed of Bitcoin. Cryptocurrencies are unlikely to become a broadly used currency, as they are not supported by any real value, which may lead to price manipulation and digital fraud, Cheng said.
In order to prevent market fluctuations that may hurt domestic investors, regulations are expected to be tightened to prevent financial risks, said Michael Taylor, a managing director of Moody's Investors Service.
Chinese regulators have long seen cryptocurrencies, including Bitcoin and Ethereum, as crypto assets, instead of real currencies. The authorities closed all cryptocurrency exchanges in China in 2017 and banned initial coin offerings, which allowed enterprises to raise funds by issuing new digital tokens.
Li Bo, vice-governor of the People's Bank of China, the central bank, said planning is underway to improve the regulatory environment for alternative investments to ensure speculation won't result in serious financial risks.
Regulators are trying to balance digital innovations and risk control, as the digital economy rapidly expands, Li said.
Shan Hui, Goldman Sachs' chief economist in China, said digital innovations are already the dominant driver of economic growth, accounting for over 60 percent of GDP growth from 2016 to 2019.
In addition to tougher controls on the cryptocurrency business, recent regulatory measures have included antimonopoly rules, privacy and data protection and restrictions on online lending. These are necessary steps for regulators to catch up with the economic reality of rapid growth and significant innovation in the internet industries, Shan said.
"In the short term, rules and restrictions are likely to slow growth in targeted areas. But in the longer term, they will help foster an environment for sustained competition and reduced risk," she said.