South Korea is planning a law to ban cryptocurrencies such as Bitcoin being traded through its exchanges
The justice minister said virtual currencies were causing the government "great concern".
Meanwhile, several Seoul cryptocurrency exchanges have been raided this week in a probe into alleged tax evasion.
Bitcoin and others lost about 10% of their value on Thursday - but it is hard to gauge how much of that was the result of events in South Korea.
Given the low levels of trading and relatively small number of people holding virtual currencies, wild price swings have become the norm, leading to an argument that paying too much attention to price rises and falls is a fairly futile exercise.
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Digital currencies such as Bitcoin have surged in value over the past year - driving a huge demand. That has led to concerns about gambling addiction as inexperienced investors try to ride the wave.
"There are great concerns regarding virtual currencies and the justice ministry is basically preparing a bill to ban cryptocurrency trading through exchanges," said Justice Minister Park Sang-ki.
It is understood the department is preparing legislation that would allow the exchanges to be shut down.
The crackdown in South Korea by authorities included a raid on the country's second largest virtual currency operator, Bithumb.
"We were asked by the tax officials to disclose paperwork and things yesterday," an official at the firm told Reuters, requesting anonymity.
The government had already said in December that it would apply more scrutiny to the exchanges, including moves to curb anonymous trading.