The total market capitalisation of cryptos dropped from US$2 trillion to US$1.8 trillion or about 10 per cent.
"Virtual currency-related business activities are illegal financial activities," the People's Bank of China said in an online statement Friday.
The central bank said offenders would be "investigated for criminal liability in accordance with the law."
The notice bans all related financial activities involving cryptocurrencies, such as trading crypto, selling tokens, transactions involving virtual currency derivatives and "illegal fundraising".
The central bank said that in recent years trading of bitcoin and other virtual currencies had become "widespread, disrupting economic and financial order, giving rise to money laundering, illegal fundraising, fraud, pyramid schemes and other illegal and criminal activities."
This was "seriously endangering the safety of people's assets," the central bank said.
While crypto creation and trading have been illegal in China since 2019, further crackdowns this year by Beijing warned banks to halt related transactions and closed much of the country's vast network of bitcoin miners.
Friday's statement by the central bank sent the strongest yet signal that China is closed to crypto.
The price of bitcoin has been on a rollercoaster ride this year amid the crackdowns from China. It also plunged when Tesla abruptly suspended the use of bitcoin for vehicle purchases, citing fossil fuel and climate change concerns.
Beijing looking for control
Bitcoin, the world's largest digital currency, and other cryptos cannot be traced by a country's central bank, making them difficult to regulate.
Analysts say China fears the proliferation of illicit investments and fundraising from cryptocurrency in the world's second-biggest economy, which also has strict rules around the outflow of capital.
The crypto crackdown also opens the gates for China to introduce its own digital currency, already in the pipeline, allowing the central government to monitor transactions.
In June, Chinese officials said more than 1000 people had been arrested for using the profits from crime to buy cryptocurrencies.
Several key Chinese provinces have banned the operation of cryptocurrency mines since the start of this year, with one region accounting for eight per cent of the computing power needed to run the global blockchain — a set of online ledgers to record bitcoin transactions.
Bitcoin values tumbled in May on the back of a warning by Beijing to investors against speculative trading in cryptocurrencies.
"China's ban on all cryptocurrency trading activity will have some short-term impact on currency valuation, but long-term implications are likely to be muted," said Ganesh Viswanath Natraj, Assistant Professor of Finance at Warwick Business School.
"This ban will result in the migration of crypto investment opportunities to other hubs in Asia, such as Singapore's launch of the DBS digital currency exchange earlier this month," he added.
