China's Ministry of Culture and Ministry of Finance issued a joint circular over the weekend that constitutes the first law governing the use of virtual currency, as reported by China View. The law explicitly bans the use of virtual currency to purchase any real world good or service.
"The virtual currency, which is converted into 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," states the new law.
The language of the circular gives virtual currency its first
legal definition in any country in the world, one that includes the
balances on the prepaid time cards. Chinese citizens use time cards in
lieu of subscriptions when playing titles like World of Warcraft. This
ruling is highly significant in light of China's infamous role in the
global grey market virtual currency trade, since it essentially
makes the trade of any sum of virtual currency for real money to a
third party illegal in China.
The law also stipulates that minors may not purchase virtual currency (which presumably includes prepaid time cards) under any circumstances. Attempts to use virtual currency for gambling purposes will be punished by public security authorities. The government also vowed to increase efforts to ferret out operations that were using virtual currency conversions to illegally launder money.
China's legal concern with the role of virtual currency goes back to 2007, when authorities became concerned that virtual currencies were being used to circumvent laws regulating gambling and trade. This year the virtual currency trade in China grew 20%, topping several billion yuan (or hundreds of millions of dollars).
The most popular of the major Chinese virtual currencies are Tencent's QQ Coins, issued to over 220 million registered users. Tencent has issued a statement stating that it "resolutely" supports the new virtual currency law and will work with authorities to help capture any person using QQ Coins in an illegal fashion.
The purpose of the law is to minimize the impact of virtual currency and goods on the real financial system. While Chinese online industry expert Cui Ran notes that current virtual currency trading volumes are too low to affect the real Chinese economy, it would be possible at the industry's current rate of growth for virtual to real currency transfers to have a significant effect in the future. By regulating virtual currency now, the Chinese government hopes to prevent any future problems.
It is unknown what, if any, relationship the new virtual currency regulation in China has to the recent sentencing of a man to three years in prison for extorting virtual currency.
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