Bitcoin continued on a volatile course on Friday after the top banking regulator proposed to classify the flagship crypto as the riskiest of assets.
Bitcoin (BTC-USD) fell 2% to $37,258 (£26,308) in afternoon trade in London after reaching as high as $37,548 on Friday morning. It enjoyed a boost on Wednesday and Thursday from El Salvador making it legal tender, rallying as much as 8% following the news.
The Basel Committee on Banking Supervision believes banks should set aside enough capital to cover losses on any bitcoin holdings in full and has issued a public consultation on proposals for the treatment of banks' cryptoasset exposures.
The plans would make it very expensive for banks to hold digital currencies, which could hinder a wider market acceptance of tokens. One proposal is to attach a 1,250% risk to a bank’s exposure to bitcoins and certain other cryptos.
Experts have said that the US "needs to form" a new crypto regulation commission to encompass both markets and institutions if it's "serious about regulating" bitcoin and other crypto assets.
"Because most exchanges are unregulated, volume and price manipulation strategies are still rampant on most," said Carol Alexander, Professor of Finance at the University of Sussex. "Crypto is characterised as the Wild West of financial markets at the moment – even though US regulators have been trying to rein in the sector their attempts have been underwhelming."
On Wednesday, El Salvador's president Nayib Bukele announced it would accept bitcoin as legal tender. The move makes the Central American nation the first in the world to formally adopt the digital currency.
Alexandra Clark, sales trader at Globalblock, said El Salvador’s decision to accept bitcoin as legal tender "prompted Iran and India to change their tune on crypto."
"Indian authorities have scrapped their plans for a total ban and will instead move to classify cryptocurrencies as an alternative asset class and Iran is planning to introduce a legal framework for crypto," Clark added. "This is yet another example of countries that have previously banned crypto changing their approach as they see adoption regardless and is another piece of bullish news flow for bitcoin."
Adoption of cryptocurrencies have been a hot topic in recent months, and have been boosted by institutional support.
Several organisations, including MicroStrategy (MSTR) and Tesla (TSLA) have invested billions of dollars into cryptocurrencies. Traditional financial firms like PayPal (PYPL) and Goldman Sachs (GS) have also begun handling the asset on behalf of clients, leaving them with potential exposure.
However it has also faced staunch opposition from governments and central banks which have been keen to regulate digital currencies.
The UK's Financial Conduct Authority has warned that if consumers invest in cryptoassets, "they should be prepared to lose all their money."
Meanwhile the Internal Revenue Service in the US has said it needs more authority from Congress to regulate the cryptocurrency industry and collect information on transfers valued at over $10,000 that mostly go unreported.
In May, Chinese vice-premier Liu Hu had said China would "severely crack down on illegal securities activities and severely punish illegal financial activities."
Watch: What is bitcoin?