The apex bank says transactions in Bitcoin and other currencies are usually untaceable and anonymous, making them attractive for criminal use.
This comes as popular Ponzi scheme, MMM recently introduced plans to pay Nigerians in Bitcoin, a move that is yet to come to fruition.
A virtual currency, according to the European Central Bank, is "a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community."
The CBN gave the directive in a circular issued by its Director of Financial Policy and Regulation, Kevin Amugo.
Virtual currencies, such as Bitcoin, LiteCoin, Peercoin, Magneto and others are typically used to trade in online communities and are exchanged for value on different platforms.
However, in Nigeria, as in most countries, they are not regarded as legal tender, mostly due to their instability and the fact that it has no physical form.
In explaining its reason for the ban, the CBN circular stated that transactions involving these currencies are usually untraceable and anonymous, making them attractive to criminals, especially for terrorism and money laundering.
Among other things, the banks were directed to ensure that they do not "use, hold, trade, and/ or transact in anyway in virtual currencies".
The CBN also stated that any suspicious transactions by existing customers involving virtual currencies should immediately be reported to the Nigerian Financial Intelligence Unit (NFIU).