Japan will this week set out rules on how to handle bitcoins, the first sign that the government is taking action on regulating the virtual currency after the collapse last week of Tokyo-based Mt Gox, once the world’s dominant bitcoin exchange.

The cabinet will decide on Friday how to treat bitcoins under existing laws, said people familiar with the matter, adding that banks and securities firms will not be able to handle bitcoin as part of their main business, suggesting the crypto-currency will be treated more as a commodity, like gold.

Japan has struggled to define its approach to bitcoin since the collapse of Mt Gox, which filed for bankruptcy protection in Tokyo last week, saying it had lost bitcoins and cash worth some half a billion dollars due to hacker attacks on what it said was its lax computer system security.

Bitcoin, a digital currency that is traded on a peer-to-peer network independent of central control, has engendered a wave of creative criminality - from bitcoin theft by hacking online platforms to potentially using the crypto-currency in money laundering, bribery and buying illicit products. Its value has soared in the past year, and the total worth of bitcoins minted is now about $7 billion.

Flexcoin, a Canada-based bitcoin bank, said on Tuesday it was closing after it lost $600,000 worth of the online currency - all the bitcoins it stored - to hacker theft.

Japanese authorities are looking at possibly taxing bitcoin transactions, but it remains unclear how they could do this, given that one of the attractions of using bitcoin is that transactions are largely anonymous.

"We haven't yet thoroughly grasped the situation, but some kind of regulation is needed from the perspective of consumer protection, and we will also discuss (bitcoin) from the perspective of imposing asset tax," said Takuya Hirai, head of an IT panel in the ruling Liberal Democratic Party.

Reuters