China has banned all cryptocurrency transactions and pledged to end illegal cryptocurrency mining, dealing the hardest blow to the trillion-dollar industry.

Transactions involving cryptocurrency will be considered illegal financial activity, including services provided by offshore exchanges, the People's Bank of China said on its website. They also added that cryptocurrencies, including Bitcoin and Tether, are not fiat currencies and cannot be traded.

This is the most brutal move China has taken against cryptocurrency, and strikes at the heart of a market that has flourished and attracted enthusiasts this year, including billionaire Elon Musk. China has long expressed dissatisfaction with cryptocurrency over its links to fraud and money laundering, as well as overuse of energy.

While there are likely to still be Chinese speculators on land, activity has shifted out of the country over the years due to increasingly stringent regulations, says Clara Medalie, research lead at data provider Kaiko.

"News from China definitely affects the markets because it can shake market sentiment, but the actual effect of another Chinese ban, for now, has minimal impact on the underlying market structure," she said.

China is home to a large concentration of the world's crypto-miners that require massive amounts of energy and thus hinder the country's efforts to reduce greenhouse gas emissions. The country is the dominant player in cryptocurrency and more recently, according to the Cambridge Bitcoin Electricity Consumption Index (CBECI), it accounted for 46% of the world's hashing rate, which is a measure of the computing power used in mining and processing.

"Investors should expect a sharp price reaction as China pulls the wind out of Bitcoin's sails," said Anthoni Trenchev, co-founder of crypto lender Nexo. "The recent bounce just below $40,000 is probably exhausted by now."

Bitcoin and other virtual currencies are back on the defensive after rebounding from July lows. In the US, regulators are also now strongly warning the industry that it could repeat the toxic culture before the 2008 financial crisis. Earlier this month, the Securities and Exchange Commission sent Coinbase Global Inc. notice that it may be sued for offering proposed accounts with high interest rates.

Vijay Iyer, head of the Asia-Pacific region for cryptocurrency exchange Luno in Singapore, said that while the Chinese government has made similar statements in the past, it is "a slightly nervous environment for crypto with recent SEC comments and the general macroeconomic environment with Evergrande news. Therefore, any comments of this kind will cause a sell-off of risky assets."

Bitcoin, Ether, and other digital tokens fell as China stepped up its efforts to curb cryptocurrency speculation and mining.

Bitcoin fell 7.8% to $41,220 as of 7:41 EST. The losses were more serious for other coins: Ether, EOS, Litecoin, and Dash fell by more than 7%. Crypto-related stocks have come under pressure as well: Marathon Digital Holdings Inc. fell 6% in pre-sale trading in the US.

The central bank of China has said that all cryptocurrency-related transactions are illegal, according to a Q&A statement on the PBOC website. According to guidelines on the website of the nation's economic planning agency, China has urgently eradicated cryptocurrency mining, and tough measures are essential to meet carbon emissions targets.

China scrutinized the crypto industry this year amid heightened concerns about the risks of fraud, money laundering, and overuse of energy.

In July, the central bank pledged to maintain strong regulatory pressure on cryptocurrency trading and speculation. China's stern approach is one of the reasons bitcoin prices plummeted in May and struggled to recover from previous record highs of over $60,000.

Fawad Razaqzada, an analyst at ThinkMarkets, warned that bitcoin is approaching the $40,000 level or below.

"At this point, the risks are shifted in the opposite direction," Razaqzada wrote in a note to clients. "China is a major risk that could keep prices under pressure for a while."