BEIJING—Chinese authorities are preparing to shut down the country’s bitcoin exchanges, according to people familiar with the matter, reflecting a growing unease with the virtual currency and its recent surge in value.

The policy shift in the world’s No. 2 economy shows how nations are wrestling with bitcoin and its place in the financial system. In China, specifically, the government’s attack on bitcoin comes amid a focus on preventing capital from fleeing to digital currencies.

The move could send shock waves through the burgeoning market for virtual currencies and hundreds of new companies that have sprouted up to take advantage of the open-ledger technology that underpins bitcoin. The largest of these virtual, or “crypto,” currencies, bitcoin has surged since March in part due to a loosening of restrictions in places such as Japan and advancements in buying and selling.

After a Chinese news organization Friday reported on China’s commercial-trading ban, Bitcoin slid around 10% to $4,186, from levels above $4,600 on Thursday, according to research site CoinDesk. It has hovered around that level since, closing Monday at $4,211.

China has long been a major hub for bitcoin, which was created by an anonymous programmer during the depths of the 2008 financial crisis as an alternative to official currencies. Much of the world’s bitcoin is mined—created through powerful algorithms—in China. As recently as this past January, before new rules damped trading in the country, more than 80% of global bitcoin activity took place in yuan.

In the latest move, China’s central bank together with other regulators has drafted instructions banning Chinese platforms from providing virtual-currency trading services, according to people familiar with the matter.

The end of commercial trading in virtual currencies in China is likely to further diminish bitcoin use in a large and once-promising market. It also offers a guide to other countries’ regulators seeking to bring order to what can be a chaotic market for these instruments, analysts said.

The ban was surprising for some, given that Chinese authorities have allowed bitcoin exchanges, such as BTCC, Huobi and OKCoin, to operate within the mainland for years.

Beijing’s crackdown on bitcoin is part of a broader effort to root out risks to the country’s financial system. Officials earlier this year circulated a draft of anti-money-laundering rules for bitcoin exchanges, a powerful warning, even though the regulations were never formalized, according to people familiar with the matter. The People’s Bank of China didn’t respond to a request for comment.

Now, regulators told at least one of the exchanges that the decision to shutter them has been made, one of the people said. Another said the order may take several months to implement.

More virtual-currency activity in China is moving off exchanges, where individuals can trade with each other privately, analysts say.

The stakes for Beijing grew as prices of virtual currencies like bitcoin soared, adding to the risk that Chinese investors would continue to speculate and expose themselves to big losses. Analysts and investors attribute the sharp rise in bitcoin last year to Chinese investors, who began buying it up while at the same time selling the yuan amid worries that the Chinese currency would weaken.

In recent days, bitcoin prices in China dipped lower than they did in other markets, reflecting uncertainty over the ban, said Charles Hayter, chief executive of CryptoCompare.

While China in the past accounted for the bulk of global bitcoin trading activity, the country’s share has dropped dramatically since the government started making moves to cool the market.

In April, Japan’s Financial Services Agency implemented rules that recognized bitcoin as a payment method. Since then, Japan has become the top market for bitcoin trading, accounting for almost half of global volumes. The U.S. share of trading has jumped to above 25% from 5% over the past year.

Virtual currencies in theory allow holders to bypass China’s traditional banking system to move money outside its capital-controlled borders. That could make it more difficult for Chinese regulators to maintain a tight grip on the yuan.

Regulators overseeing cyberspace administration, banking and securities trading—as well as central-bank officials—considered various options for months but ultimately came to a consensus to shut down the exchanges, said the people familiar with the matter.

“Too much disorder was naturally a basic reason” for the ban, said one of the people.

The people said that regulators will likely have to tolerate noncommercial trading of virtual currencies. “The government also doesn’t have the power to control” that, one of the people said.

This person said that regulators expect exchanges to report back on how they plan to unwind their businesses.

by Wsj