SHANGHAI Thu May 8, 2014 2:36am

China Guangfa Bank and Shanghai Pudong Development Bank Co Ltd (600000.SS) said they had banned their customers from using bank accounts for trading bitcoins, the latest blow to the virtual currency trading business in China.

The announcements, posted on the banks' websites on Wednesday, said institutional and retail customers will not be allowed to use their accounts to purchase or sell bitcoins as well as other virtual currencies. If such practices were detected, the accounts would be suspended or closed down.

This comes after bank accounts of China's two largest bitcoin exchanges at certain domestic banks were shut down in mid-April.

Du Jun, co-founder and vice president at one of China's leading digital currency exchanges Huobi.com, said the move dealt a severe blow to the industry.

"We online exchanges as well as the entire industry are facing a serious challenge. Without an incoming cash flow, it's hard to operate an exchange," he told Reuters.

China's central bank, the People's bank of China (PBOC), said in a report last week that bitcoins are essentially a vehicle for speculation and are highly unstable. It also warned that trading of bitcoins on online exchanges may be risky given the lack of regulation.

Unlike conventional money, bitcoin and other crypto-currencies are generated by computers and are not backed by any central bank or government, or by physical assets.

In December the PBOC banned financial institutions from trading in bitcoin, saying the government would act to prevent money laundering risks arising from use of the digital currency.