SEOUL (AFP) - South Korea on Wednesday (Dec 13) banned its financial institutions from dealing in virtual currencies such as bitcoin, as the cryptocurrency soars in a bubble fuelled by retail speculators, many of them from the country.

The hyper-wired country has emerged as a hotbed for cryptocurrency trading, accounting for some 20 per cent of global bitcoin transactions - about 10 times its share of the world economy.

About one million South Koreans, many of them small-time investors, are estimated to own bitcoins, and demand is so high that prices for the unit are around 20 per cent higher than in the US, its biggest market.

World bitcoin prices have surged globally this year, soaring from less than US$1,000 (S$1,350) in January to US$17,000 this week. And at the weekend futures trading in the digital currency started on the Chicago Board Options Exchange, the first time it has appeared on a traditional platform.

It is also expected to list on the rival Chicago Mercantile Exchange next week.

The Prime Minister's Office said Seoul would ban financial institutions from dealing in virtual currencies - including buying, possessing, or holding them as collateral.

Prices on Bithumb, South Korea's biggest bitcoin exchange, fell nearly five per cent after the announcement.

But the measures fell short of speculation that authorities might ban bitcoin trading in South Korea altogether, or tax profits from it.

Nonetheless initial coin offerings (ICOs) - where companies sell newly invented cryptocurrencies to investors for real money - will be outlawed, the Prime Minister's Office said in a press statement.

The government will also strengthen investor protection rules, in an effort to curb speculation and potential fraud.

South Korea's Financial Services Commission in September ordered a ban on ICOs, declaring "cryptocurrencies are neither money nor currency nor financial products".