* Japan cabinet will set bitcoin rules on Friday
* Bitcoin won't be treated as bank, securities business
* Virtual currency likely to be treated like gold
* Japan struggling to define its response after Mt. Gox collapse
By Noriyuki Hirata
TOKYO, March 5 (Reuters) - Japan will this week clarify the legal handling of bitcoin, people familiar with the matter said, 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 largest bitcoin exchange.
The cabinet will decide on Friday how to treat bitcoin under existing laws, the people said, adding that banks and securities firms will not be able to handle bitcoin as part of their main businesses, suggesting it will be treated more as a commodity, like gold.
The government wants bitcoin transactions to be taxable, the Nikkei and Yomiuri newspapers said, but it remains unclear how the authorities could do this, given that one of the attractions of using bitcoins is that transactions are anonymous.
Bitcoin is a digital currency that, unlike conventional money, is bought and sold on a peer-to-peer network independent of central control. Its value has soared in the last year, and the total worth of bitcoins minted is now about $7 billion.
Japan has struggled to define its approach to bitcoin since the collapse of Mt. Gox, which filed for bankruptcy protection in Tokyo on Friday 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.
Japan's Finance Ministry and Financial Services Agency have said bitcoin is not a currency and doesn't fall under their purview, while the Bank of Japan has said it was studying the bitcoin phenomenon with interest.
"We still have not had a clear grasp of the situation," Finance Minister Taro Aso said on Tuesday about the Mt. Gox bankruptcy. "We don't know if it was a crime or just a bankruptcy."
The virtual currency has engendered a wave of creative criminality - from hacking online platforms to steal bitcoins to their potential in money laundering, bribery and buying illicit products.
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. Flexcoin had said last week it was not affected by Mt. Gox's closure and had "not lost anything."
Last week, U.S. Federal Reserve Chair Janet Yellen said Congress should look into legal options for regulating virtual currencies such as bitcoin.
Shanghai-based BTC China, the world's largest bitcoin exchange by volume, has imposed regulations to curb bitcoin trade weeks after Beijing banned financial institutions from trading in bitcoin due to the risks involved.
Russian authorities have issued warnings against using bitcoin, saying treating it as a parallel currency is illegal. Britain, however, has supported bitcoin and is preparing to abort plans to tax bitcoin trading, the Financial Times has reported.