The justice minister said virtual currencies were causing the government "great concern".
“There are great concerns regarding virtual currencies and justice ministry is basically preparing a bill to ban cryptocurrency trading through exchanges,” Justice Minister Park Sang-ki said at a press conference.
Once a bill is drafted, legislation for an outright ban of virtual coin trading will require a majority vote of the total 297 members of the National Assembly, a process that could take months or even years.
“Cryptocurrency trading becomes akin [to] speculation and gambling . . . it is a risky trading form which can inflict serious financial damage on citizens,” said Mr Park.
The government’s tough stance triggered a selloff of the cyrptocurrency on both local and offshore exchanges.
Bitcoin was down more than 10 percent on the Luxembourg-based Bitstamp at $13,199, after earlier dropping as low as $13,120, its weakest since Jan. 2.
The government had already said in December that it would apply more scrutiny to the exchanges, including moves to curb anonymous trading.