Too Soon to Sound the Death Knell for “Gold Farming?” Yeah, Probably.

Neal Black, vice president and general counsel, Live Gamer
Laura Brown, senior manager, corporate development, Live Gamer

The Chinese Ministry of Commerce and Ministry of Culture released a joint circular prohibiting the use of virtual currency to trade in real goods and services. The stated aim of the government’s policy is to reduce the disruption that virtual currency trading may have on China’s real-world currency markets and to curb the use of virtual currency for such illicit activities as money laundering and gambling. The Chinese government has defined “virtual currency” as any online currency used to recharge, prepay, or purchase points for online game accounts. This would, presumably, include prepaid game cards and in-game currencies and game points that can be purchased from the game publisher for real money.

Live Gamer supports these measures and their stated goal of cracking down on illegal online activities, such as money laundering and gambling. Live Gamer also takes a broader stance in opposition to “gold farming,” as well as any other activity that violates a game publisher’s terms of service or infringes upon a game publisher’s intellectual property rights. The extensive press coverage since the circular was released has resulted in various interpretations of the policy, including headlines suggesting that gold farming is dead in China and perhaps even real-money trading of virtual items in general. Although we’ll have to wait and see what new information comes to light about this most recent step by the Chinese government to exercise greater control over transactions in the virtual space, it appears to Live Gamer, at least preliminarily, that this most recent step is focused almost exclusively on curbing illegal online activity and attempting to minimize the disruptive impact on real-world currency markets of virtual currency that is purchased by users for real money.

Based on our current understanding of the policy circular, “virtual currency” does not encompass virtual items that are awarded to users as part of the game play. That should include in-game currency as long as the in-game currency is awarded only through game play and cannot be purchased by users from the game publisher for real money. Thus, in a dual currency game environment, where one form of currency may be purchased and another form can only be earned through game play, the currency that cannot be purchased would likely not be deemed a “virtual currency” for purposes of this measure. As such, we believe it is unlikely that this measure will have an enormous impact on publisher-sanctioned player-to-player marketplaces in which legitimate players - not gold farmers - exchange virtual items that are awarded or otherwise generated through game play, such as weapons, armor, characters, and the like.

This latest move by the Chinese government follows the government’s decision last October to tax profits made from trading in virtual currency at 20%. So, is this new measure just one more step by the Chinese government toward exercising greater control over transactions in the virtual space? Could there be more to come? Almost certainly. And, in the coming days, weeks, and months, we may learn more about how the policy set forth in the circular is to be interpreted, which may change everyone’s view of the effect of this new measure on real-money trading and gold farming, in particular. But, despite how the policy circular was initially characterized in the immediate aftermath of its issuance, it does not appear that it is, in and of itself, the death knell for gold farming - unfortunately. And, as discussed above, the exchange of virtual items for real-money, in general, appears to be unaffected.

One data point in support of this conclusion regarding gold farming is the fact that this new measure mirrors quite closely a policy that was instituted in Korea in 2006 based around a game called “Sea Story.” At the time the Korean government instituted its new policy, substantial gambling, and then illicit political payoffs, had arisen around use of the Sea Story currency, which resulted in the Korean government banning trade in virtual currencies. Unfortunately, there does not appear to be any evidence that this move by the Korean government directly impacted gold farming.

Until now, online gamers could use virtual currency to purchase real goods and services from the publisher that issued the virtual currency as well as third parties, which has given rise to an escalating trade in virtual currency. The China Internet Network Information Center valued the trade in virtual currency for real items at 10 billion to 13 billion Yuan Renminbi, some $2 billion, in 2008. Online virtual currency has seen sharp movements in value against China’s official currency, sparking concern at the nation’s Central Bank.

Under the new measure, no company that issues a “virtual currency” (as that term is defined in the policy circular) will be permitted to operate a platform that facilitates the exchange of such virtual currency between users, and no company operating a virtual currency trading platform will be permitted to issue a virtual currency. It is our understanding that a game publisher may still issue a virtual currency, even one that is sold by the publisher to its users in exchange for real money, as long as the virtual currency cannot be used to purchase physical goods or to purchase services or virtual items from any person or entity other than the original issuer. So, for example, in-game currency can only be used to pay for virtual items in the same game in which such in-game currency is awarded. In other contexts, such as certain financial services regulations in the United States, this type of system might be referred to as a “closed-loop system.”

What is perhaps a little less clear is whether a virtual currency, so defined, could be exchanged among players in a publisher-sanctioned marketplace as long as such virtual currency can only be used to purchase goods and services from the original issuer - the game publisher. The answer may turn on the scope of the prohibition against the use of a virtual currency to purchase goods and services from anyone other than the original issuer. Is exchanging a virtual currency with another legitimate player on a publisher-sanctioned marketplace for real-money equivalent to using that virtual currency to purchase goods or services from that other player? That other player is certainly not the original issuer of the currency. But, on the other hand, the currency is only useful as a means of purchasing goods and services from the original issuer. The policy circular does appear to include a requirement that game publishers, as opposed to virtual currency trading platforms, implement technological constraints to prevent the transfer of virtual currency between user accounts. Perhaps this clarifies that a virtual currency - one that can be purchased - may not be traded for real money. And, if that is true, then we could perhaps sound the death knell for that aspect of gold farming that relies heavily on the sale of virtual currencies.

Pursuant to the policy circular, companies already involved in virtual currency trading are required to register with the local cultural affairs bureau within three months and must meet certain regulatory requirements. So, it looks like the current set of virtual currency and virtual item traders may be able to keep their doors open, assuming their applications are accepted and the regulatory requirements are met. Gamers buying virtual currency and goods will no longer have stored value on these platforms or need to buy platform-specific currency and thus will have to pay directly at the time of transaction. The loss of these trading platforms’ online currency system is likely to have an impact on customer loyalty, transaction frequency and conversion, but it appears that the real-money trading market, as a whole, will remain intact.

The measure could directly affect QQ coins, of course. QQ coins are the units of virtual currency issued by Tencent, which has moved outside just the online space, but also acts as a tradable currency in the real world for real items. QQ coins have been known to be used to purchase physical goods, such as food and clothing, at points of sale in retail stores. The policy circular issued last week follows a joint statement issued back in February of 2007by 14 Chinese ministries and China's central bank in which the government and the bank called on companies to stop trading QQ in order to prevent money laundering. That same month, five Chinese internet companies, including Tencent, issued a joint statement urging the government to regulate the game-credit and virtual-property trade. Last week’s policy circular appears to be part of the Chinese government’s response - the next step in the government’s attempt to gain control of the trading of QQ and similar types of virtual currency. It has been reported that Tencent has issued a statement stating that it "resolutely" supports the new measures and will work with Chinese authorities to help prosecute anyone using QQ coins illegally.

So, unfortunately, it remains unclear exactly how this measure will impact gold farming, if at all, an industry worth $500 million according to Professor Richard Heeks at the University of Manchester. It appears clients of the gold farmers will still be able to use their sources to acquire in-game currency and other in-game items awarded through game play, but it seems likely that gold farmers will be barred from selling forms of virtual currency that can be purchased from publishers. In the end, the Chinese government may find it difficult to reinforce any policy that curbs gold farming since many of the gold farmers operate on servers outside China. Of course, gold farming was not explicitly cited as a concern for the government in issuing the recent policy circular. As discussed above, the Chinese government seems more focused on protecting real-world currency markets and tightening controls on illicit activities, both of which are objectives that Live Gamer supports. And, certainly any reasonable effort to curb gold farming that preserves the rights of a game publisher to choose to allow legitimate players to exchange virtual items in real-money transactions in a sanctioned forum in compliance with such publisher’s terms of service would have Live Gamer’s support, as well.

As more and better information becomes available, including answers to some of the questions regarding how this new policy will be interpreted, we will know more about the effect that this measure will have on gold farming and real-money trading of virtual items, in general, and we will look to update the game community on our latest thinking. For more information, visit www.livegamer.com.