Internet in China: ban on use of virtual money for real goods trading

In a world of increasingly virtual human interactions, the idea of money is becoming more fluid than authorities find comfortable. China has officially outlawed the practice of exchanging virtual currency for real goods, and minors are no longer able to buy the virtual cash. These rules will help the government control trade in China, but they could also impact the huge gold-farming industry that exists in the country.

China has unveiled the first official regulation, banning the use of virtual currency in trade of real goods and services to limit its possible impact on the nation’s real financial system.

The government also spells out the definition of the virtual currency for the first time, which includes prepaid cards of the virtual game, but excludes any outfit such as costume and weapon in the game, according to a joint circular issued by the Ministry of Culture and the Ministry of Commerce recently.

“The virtual currency, which is in exchange with real money at a certain exchange rate, will only be allowed to trade in virtual goods and services provided by its issuer, not real goods and services.” it said.

It’s easy to understand why China has such a problem with “virtual” currency being used for so many purposes. Tencent QQ is China’s most popular instant-messaging client, offering a currency called QQ Coins that are used for purchasing items for their online identity. This currency has become popular among the youth, and now many online stores will accept the coin as actual payment for goods or online gaming. Using this virtual currency for real-world transactions outside of the messaging service makes it an ideal way to hide transactions, giving organized crime a potential route to launder money.

China has the world’s largest population of Internet users, with 298 million people online by the end of last year, and media reports showed the virtual money trade topped several billion yuan last year after rising around 20 percent annually.

Since 2007, the vibrant virtual money trading has caught the attention of the government officials, who demanded tighter controls as it had become a hotbed for gambling and illicit trade under the guise of e-commerce. Under the new rules, using virtual money for gambling will be punished by public security authority, and the underage are not allowed to buy virtual money.

Tencent.com, which has about 220 million registered users — about as many as Facebook — is quoted in the Chinese government news release as “resolutely” supporting the new rule. The government justifies its ban on virtual currency trading as a way to curtail gambling and other illegal online activities.

The Chinese government, however, appears to be uninterested in regulating sales of in-game items for real cash.  A report in the English-language China Daily says that in-game gear is not considered virtual currency, so selling virtual items can be expected to continue.

The trading of virtual currency for real cash employs hundreds of thousands of people worldwide and generates between $200 million and $1 billion annually, according to a 2008 survey conducted by Richard Heeks at the University of Manchester. He estimates that between 80% and 85% of gold farmers are based in China.

“Many online games have a virtual economy and an in-game currency,” he states in his survey. “Gold farmers can play in-game to make some currency. They then sell that for real money — typically via a Web site and using the PayPal payment system — to other players of the game.”

Game companies typically forbid gold farming but committed virtual currency traders find ways around such rules. Some game companies have recognized the futility of trying to ban the practice and have built virtual commerce into their game infrastructure while others simply offer their game up for free or include a roblox hack, and then make their money off sponsorship, brand placement etc.

The Chinese Ministry of Culture also vowed to step up supervision on launder of money via virtual credits and other illegal online activities.