Industry Insights: Too Soon to Sound the Death Knell for Gold Farming?

On Friday, June 26, 2009, 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.”