The price of bitcoin has plummeted by 50 percent since record highs in late November, with selling accelerating on Wednesday after reports that the People's Bank of China (PBoC) has ordered third-party payment providers to stop using the virtual currency.
The price of a bitcoin fell to below $600 after stabilizing near $800 for the last couple of weeks after a price slump from $1,200 in late November. At 8 a.m. London time on Wednesday the currency was trading at $555 on major exchange Mt Gox and $550 on CoinDesk's index, which measures a basket of prices around the world.
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China's central bank has ordered third-party payment agencies - which provide clearing services for bitcoin exchanges - to stop any "custody, trading and other services" related to the virtual currency, according to a report Tuesday by Yicai.com. The Chinese website - which is affiliated with the China Business Network TV station - added that platforms were told to end working relationships with virtual currency exchanges before Chinese New Year which commences at the end of January.
Zhou Jinhuang, the deputy director of payment clearance at the People's Bank of China is reported to have chaired the closed-door meeting on Monday when more than 10 third-party payment platforms were given the news. Attendees included a representative from Alipay, which is China's leading third-party online payment solution, according to its website.
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BTC China, the world's largest bitcoin exchange, according to Bitcoinity.org, stopped accepting deposits in Chinese yuan on Wednesday due to the clampdown. Bobby Lee, the CEO of BTC China told CNBC that he had received notice from his third-party payment processor on Wednesday.
"They essentially have cut us off from allowing customer deposits into BTC China's bitcoin exchange," he said. "Customers don't have to worry, the deposits are still here, the withdrawals will still be allowed. So there's no need to panic on that."
Lee added that he believes the recent clampdown is not due to government officials in the country fearing that bitcoin is helping customers to move yuan out of China. "Bitcoin exchanges are legal...so our business model is still valid but we're under some pressure in terms of being able to work with third-party payment companies. So we're looking for alternatives," he said.
BTC China only deals with bitcoin yuan trades due to the strict currency controls in the country. Lee said that his company did not have any near-term plans to look at other currencies. Zennon Kapron, founder of Shanghai-based financial consultancy group Kapronasia, agrees with Lee that the clampdown wasn't necessarily due to fears of capital outflows.
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"The wealthy in China have always found ways, ether legally or illegally, to move their money out of the country," he told CNBC via telephone. He said that hints from the central bank that bitcoin exchanges were still legal meant there were "mixed messages" from the government. Chinese curbs may have hit the price of bitcoin hard but Kapron believes that the U.S. still plays a major role in the industry and it remains to be seen how U.S. authorities will regulate the digital currency.
As well as the news from China, the U.S. Treasury Department also offered a warning on bitcoin on Wednesday. The Treasury's Financial Crimes Enforcement Network (FinCEN) has sent "industry outreach" letters to about a dozen firms, according to Reuters, which highlights that businesses linked with bitcoin may have to comply with federal law and regulation as money transmitters.
Bitcoin is a "virtual" currency that allows users to exchange online credits for goods and services. While there is no central bank that issues them, bitcoins can be created online by using a computer to complete difficult tasks, a process known as mining. Some 12 million bitcoins are believed to be in circulation, with a cap of 21 million — meaning no more bitcoins can be created after that point.
The initial fall in price in early December coincided with a statement released on the website of China's central bank which warned of the risks that the crypto currency posed. It warned that Chinese financial institutions should not trade the digital currency saying that while it does not yet pose a threat to China's financial system, it carries risks.
Its surge to over $1,000 in November was attributed partly to increased interest from Chinese users as well as favorable comments by regulatory officials at a U.S. Senate hearing in November. Former Federal Reserve Vice Chairman Alan Blinder has been quoted as saying that the crypto currency shows "promise".
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BTC China exchange is now believed to have the highest number of registered users and received $5 million in November from institutional investors Lightspeed China Partners and Lightspeed Venture Partners.
Chinese search engine Baidu announced in October that it had started to accept bitcoin for its security service. This came after Chinese state television company CCTV broadcast a documentary detailing the digital currency in the summer. Many analysts see that as a key point at which interest in bitcoin increased.
Downloads of bitcoin wallets surged in China in the days following the documentary, according to statistics from SourceForge, rising to second place in the global ranking behind the United States. Bitcoincharts.com has data that shows the Chinese yuan is the second most traded currency pair with bitcoin after the U.S. dollar.
— CNBC.com's Matt Clinch. Follow him on Twitter @mattclinch81