China Bars Conversion of Virtual Currency into Material Products

A number of news outlets are reporting on a recent rules issued by the Chinese government limiting the use of virtual currency in that country. The best online explanation I've found is a story by Mure Dickie in the Financial Times.

A formal notice quietly issued to officials last month by the Communist party and government departments, including the central bank, has ordered “strict differentiation between virtual exchanges and online commerce in material products”.

The notice says: “The People's Bank of China will strengthen management of the virtual currencies used in online games and will stay on the lookout for any assault by such virtual currencies on the real economic and financial order.”

Virtual money can only be used to buy virtual products and services the companies provide themselves, issuance will be limited, and users are “strictly forbidden” from trading it into legal tender for a profit, says the notice.

The new restrictions appear to be a reaction to the growing popularity of a virtual money product known as "QQ Coins."

The restrictions follow Beijing’s growing concern about the influence of currencies created by internet companies, particularly the wildly popular "QQ Coins" issued by Hong Kong-listed messaging and games provider Tencent.

Tencent's messaging system is used by an estimated two-thirds of Chinese internet users and its QQ Coins have been accepted as payment by other companies as well as sold for legal tender.

It isn't clear what exactly is China's primary concern about virtual currencies. The AP says the worry is "money laundering or illicit trade." The Asia Times, however, has suggested that there is concern that the virtual currency could harm China's real currency.

The so-called "QQ" coin - issued by Tencent, China's largest instant-messaging service provider - has become so popular that the country's central bank is worried that it could affect the value of the yuan.

Public prosecutor Yang Tao issued this warning: "The QQ coin is challenging the status of the renminbi [yuan] as the only legitimate currency in China."

Some additional interesting tidbits on QQ coins from the Asia Times:

Tencent boasts more than 220 million users, and its QQ coins can be purchased with a bank, telephone or "QQ" card at an official price of 1 yuan (12.5 cents) per coin. Originally, the virtual coins were designed to pay for Tencent services such as electronic greeting cards, online games and anti-virus software. Now, however, they have reportedly developed into an alternative currency traded on the black market and used for other, less savory services, such as online gambling and private chats with "QQ girls".

Xinhua, China's official news agency, reports cases of people earning thousands of yuan per month trading in QQ coins, which they can win by playing online QQ games that pay out one coin for every 10,000 points earned. Xinhua also reports that the operators of some Internet forums are now paid in QQ coins rather than the official currency. And there is evidence that other online sites not associated with Tencent also accept QQ coins.

In addition, unofficial online vendors have sprung up to take advantage of QQ fever. They accumulate large numbers of coins by hiring professional game players to win them and also through gambling ploys, inside connections at entertainment companies and even by hacking into user accounts and simply stealing them. Then they sell the virtual currency below its official value, at a rate of 0.4-0.8 yuan per coin.

Tencent recently reported that its 2006 revenues were $358.6 million, an increase of 96% over the previous year. Net profit was $136 million, a whopping 119% jump over 2005. I can't find an official statement (at least one in English) on either the Tencent or QQ.com sites responding to the new rules on virtual currency.

I can't wait to see if other countries follow the Chinese example and attempt to limit the use of virtual currencies to purchase material goods. I don't see how such a rule could be successfully implemented without a corollary prohibiting the sale of virtual goods for real money. If you want to prevent financial transactions which are illegal in this world from taking place in a virtual world, you will have to severely limit the movement of money and goods between the two.