Israel said on Wednesday it was considering regulation of bitcoin and warned citizens that using such decentralised virtual currencies was risky.
Supporters of bitcoin are drawn to its decentralised platform and say it is here to stay. Detractors call it a bubble and expect it to be forgotten in a year or two.
Israel, home to pioneering firms in hi-tech fields such as cryptography, has emerged as a bitcoin hotspot, prompting central bank governor Karnit Flug to convene a meeting this week with other regulators, including those for capital markets, taxes, securities and money laundering and terror financing.
"It was agreed to continue to examine various perspectives related to the use of, and trade in, virtual currencies," the authorities said in a joint statement on Wednesday.
"These perspectives include possible macro effects, their legal standing, their regulation, money laundering and terror financing risks, taxation and consumer protection."
They said the Israeli public should be aware that bitcoin is unsupervised, is not legal tender and presents fertile ground for fraudulent activities. At the same time, such transactions are anonymous and often hard to trace, they added.
Criminal activity"This anonymity is liable to be exploited for criminal activity, including money laundering, financing illegal activities and financing terrorism," the statement said.
"Law enforcement authorities are therefore likely to close trading platforms in virtual currencies which are used for illegitimate activities, by preventing access or use of customers' capital, which would likely be held by those platforms," the statement added.
Other governments have also issued warnings on the use of bitcoin and New York's financial regulator revealed plans this month to govern virtual currency firms in the state in order to protect consumers and combat money laundering.
At least two dozen Israeli startups have popped up in the past year with a view to creating tools that will allow bitcoin to be used in almost any kind of transaction - from buying shoes to issuing company stock.
In recent weeks, bitcoin was hit by attacks from unknown computer hackers that led to problems at two exchanges. They had to temporarily halt withdrawals by customers who stored bitcoins in digital wallets provided by the exchanges.
This week, a bitcoin is worth about $635, down from around the $1,000 mark in late 2013. However, it was worth only about $150 as recently as last September.