The South Korean government on Thursday said it plans to ban cryptocurrency trading, sending Bitcoin prices plummeting and throwing the virtual coin market into turmoil as the nation's police and tax authorities raided local exchanges on alleged tax evasion.
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.
Justice minister Park Sang-ki said the government is preparing a bill to ban trading of the virtual currency on domestic exchanges.
"There are great concerns regarding virtual currencies and [the] justice ministry is basically preparing a bill to ban cryptocurrency trading through exchanges," said Park at a press conference, according to the ministry's press office.
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 will require a majority vote of the total 297 members of the National Assembly, a process that could take months or even years.
The South Korean government's tough stance triggered a selloff of the cyrptocurrency on both local and offshore exchanges.
The local price of Bitcoin plunged as much as 21 percent in midday trade to 18.3 million won ($17,064.53) after the minister's comments but it is still trading at around a 30 percent premium compared to other countries.
Bitcoin was down more than 10 percent on the Luxembourg-based Bitstamp at $13,199, after dropping as low as $13,120 earlier, its weakest point since January 2.
South Korea's cryptocurrency-related shares were also hammered. Vidente and Omnitel, which are stakeholders of Bithumb, skidded by the daily trading limit of 30 percent each.
Park Nok-sun, a cryptocurrency analyst at NH Investment & Securities, said the herd behavior in South Korea's virtual coin market has raised concerns.
Indeed, Bitcoin's 1,500 percent surge last year has stoked huge demand for cryptocurency in South Korea, drawing college students to housewives and sparking worries of gambling addictions.
"Virtual coins trade at a hefty premium in South Korea, and that is herd behavior showing how strong demand is here," Park said. "Some officials are pushing for stronger and stronger regulations because they only see more [investors] jumping in, not out."
There are more than a dozen cryptocurrency exchanges in South Korea, according to Korea Blockchain Industry Association.
The proliferation of the virtual currency and the accompanying trading frenzy have raised eyebrows among regulators globally, though many central banks have refrained from supervising cryptocurrencies themselves.
The news on South Korea's proposed ban came as authorities tightened their grip on some of the cryptocurrency exchanges.
The nation's largest cryptocurrency exchanges like Coinone and Bithumb were raided by police and tax agencies this week for alleged tax evasion. The raids follow moves by the finance ministry to identify ways to tax the market that has become as big as the nation's small-cap Kosdaq index in terms of daily trading volume.
Some investors appeared to have taken preemptive action.
"I have already cashed most of mine [virtual coins] as I was aware that something was coming up in a couple of days," said Eoh Kyung-hoon, a 23-year-old investor.
Bitcoin sank on Monday after website CoinMarketCap removed prices from South Korean exchanges, because coins were trading at a premium of about 30 percent in Asia's fourth largest economy. That created confusion and triggered a broad selloff among investors.
An official at Coinone said that a few officials from the National Tax Service raided the company's office this week.
"Local police also have been investigating our company since last year, they think what we do is gambling," said the official, who spoke on condition of anonymity, adding that Coinone was cooperating with the investigation.
Bithumb, the second largest virtual currency operator in South Korea, was also raided by the tax authorities on Wednesday.
"The nation's tax office and police declined to confirm whether they raided the local exchanges.
South Korean financial authorities had previously said they are inspecting six local banks that offer virtual currency accounts to institutions, amid concerns the increasing use of such assets could lead to a surge in crime.