The price of bitcoin fell 6% to $42,081, according to Coin Metrics data. Ethereum, the second-largest digital currency, fell 10% to $2,834.
It comes after the People's Bank of China said in a Q&A that all crypto-related activities are illegal. Services offering trading, order matching or derivatives for virtual currencies are strictly prohibited, the PBOC said, while overseas exchanges are also illegal.
Beijing has cracked down sharply on crypto this year. The Chinese government moved to stamp out digital currency mining, the energy-intensive operation that validates transactions and produces new coins. That led to sharp slump in bitcoin's processing power as miners took their equipment offline.
The PBOC banned banks and non-bank payment institutions like Alibaba affiliate Ant Group from providing services related to virtual currency. In July, authorities told a Beijing-based software company to shut down over its involvement with crypto trading.
Vijay Ayyar, head of Asia Pacific at digital currency exchange Luno, said that, though China's position on crypto was not new, it was enough to tip the market into negative territory. Investors had already been unnerved by the U.S. Securities and Exchange Commission taking a tougher line on cryptocurrencies lately, he added.