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China's central bank warned Thursday that Bitcoin carries substantial risks and issued new rules that prohibit financial institutions from dealing in the digital currency.
Demand for bitcoin has been particularly strong in China, where investors have eagerly embraced the currency and helped drive its price to dramatic new highs above $1,000 in recent weeks.
Following the central bank's announcement, prices on the largest Bitcoin exchange in China plummeted by more than 20% before mounting a mild comeback.
China's central bank warned its banks Thursday against Bitcoin trading, a move seen as a first step toward regulating the highflying virtual currency. But China, which has become Bitcoin's biggest market, did not restrict individuals from using it.
Still, Bitcoin, which has skyrocketed in recent months, suffered double-digit percentage losses in volatile trading.
The People's Bank of China said Bitcoin is a currency with no "real meaning" and poses risks to the nation's financial system, though it is not yet a threat. The PBOC said banks can not price, trade or insure Bitcoin or Bitcoin-linked products.
As Bitcoin grabs headlines and soars to stratospheric prices, two major financial powers, China's central bank and Bank of America, reached opposite conclusions about whether the popular cybercurrency has a legitimate place in world commerce.
China's central bank on Thursday banned the country's financial institutions from trading in Bitcoin, saying the virtual money is too volatile, too risky and legally suspect. Meanwhile, Bank of America Merrill Lynch, in its first research report on Bitcoin, said the currency has potential to become a "serious competitor" to money-transfer providers.
In a move that is sure to spark debate on both sides for some time, the man just gave Bitcoin a healthy dose of legitimacy. Today, Bank of America BAC -1.28% became the first major finical institution to initiate analyst coverage of Bitcoin. FX and Rate Strategist David Woo declared a maximum fair value of $1,300 and a maximum market capitalization of $15 billion.