South Korea is planning a law to ban cryptocurrencies such as Bitcoin being traded through its exchanges.
The justice minister said virtual currencies were causing the government "great concern".
Meanwhile, several Seoul cryptocurrency exchanges have been raided this week in a probe into alleged tax evasion.
Bitcoin fell about 7% to just under $13,800 on Thursday, although that decline may not be directly related to the South Korean decision.
Given the low levels of trading and relatively small number of people holding virtual currencies, wild price swings have become the norm, leading to an argument that paying too much attention to price rises and falls is futile.
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Digital currencies such as Bitcoin have surged in value over the past year - driving a huge demand.
That has led to concerns about gambling addiction as inexperienced investors try to ride the wave.
"There are great concerns regarding virtual currencies and the justice ministry is basically preparing a bill to ban cryptocurrency trading through exchanges," said South Korean justice minister Park Sang-ki.
It is understood the department is preparing legislation that would allow the exchanges to be shut down.
The crackdown in South Korea by authorities included a raid on the country's second-largest virtual currency operator, Bithumb.
"We were asked by the tax officials to disclose paperwork and things yesterday," an unnamed official told Reuters.
The government had already said in December that it would apply more scrutiny to the exchanges, including moves to curb anonymous trading.