News that China "banned gold farming" spread like wildfire across the blogosphere last week. ZAM takes a closer look at the new law (which turns out to be something entirely different) to uncover the truth.

Last week, we reported that China passed a law that prohibits the sale of virtual currencies. The story has made quite a few laps around fansites and blogs throughout the last few days, mainly billed as "China Bans Gold Farming," or some such title. While there's a bit of truth in that aspect of the story, it's not the whole truth. There has been a considerable amount of misunderstanding surrounding the issue, even from otherwise-reputable sources.

Quite a few news sites and bloggers jumped the gun (for the sake of fairness, I won't link one specific site, since I can't link them all), interpreting the new law as the absolute end of most gold-selling companies. It was also predicted that the new law would prohibit a China-based MMO publisher from selling virtual currency to its own customers, regardless of third-party "farming" outfits. In an effort to peel back the outer layers of this story (and differentiate fact from fiction), we'll take a closer look at the new law and the impact it may—or may not—have on the MMO industry.

As you've probably heard many times in the past, the "virtual currency market" in China generates the equivalent of millions of US dollars per year. One of the top-sourced news articles (via InformationWeek.com) that broke the story about the new law claimed the market generates between $200 million and $1 billion annually, according to a UK survey. The report also states that around 80 to 85 percent of all virtual currency sellers are based in China.

It's a big business, despite the opposition and bad name it receives from critics. The virtual currency market—or "gold selling"—is a booming industry that the Chinese government estimates is growing 20 percent every year, according to the same article. Gold selling isn't just a fly-by-night operation, as it was in the early days. Thousands of Chinese citizens are employed by gold selling companies, sometimes providing food and lodging in addition to wages.

Shortly after the country's effort to reduce the amount of pornography accessible via Google.cn, China's Ministry of Culture and Ministry of Commerce made the announcement that "the first official rule on the use of virtual currency in the trade of real goods and services to limit its possible impact on the real financial system," as outlined in the official release. Quoted to the letter, the law is described as follows:

"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."

The most important part of that description is the "provided by its issuer" bit (and consequently, a vital point that was overlooked or not understood by many of the news stories that prematurely announced "the end of gold selling"). Another important bit that has been grossly overlooked is the Ministry's self-described reasoning for the ban, which was the "government demanding tighter controls as such trading became an avenue for gambling and illicit trade."

When the story first broke, it spread like wildfire across the blogosphere. Unless a link to the official release from the Ministry was provided, it was far too easy to misinterpret the new law (and the ramifications it would have within the MMO industry). Once you've read the official statement though, the real story begins to take an entirely different shape.

After these first layers are peeled back, the whole issue begins to seem less inspired by World of Warcraft-type gold selling, and more about governmental oversight regarding "rogue" operations profiting outside official jurisdictions. For example, the Ministry's release referenced a huge Chinese company called Tencent.com that sells "QQ Coins," a widely-used virtual currency. Tencent is a major supporter of the Ministry's new law, allegedly because of a vast amount of "underground" buying and selling of the currency.

In other words, companies like Tencent (as well as the Chinese government) aren't too happy about third parties or other companies cutting in on their business. The release states that such operations enable "theft and fraud" (which might well be the case). But it's also easy to connect the dots and see the Chinese government and big companies' desire to keep these "underground" hands out of their cookie jars.

A few days after the story broke, many news sites began issuing retractions or writing new articles that re-examined the law. It turns out that the primary focus of the law is, in fact, the opposite of what many people originally assumed. As you might have already surmised, it's more about using "virtual currency" to buy real-world items or trade for real currency. The concept is best-described by University of Manchester's Prof. Richard Heeks, in his ICT economy blog:

"As announced [virtual currency] can now only be used to pay for virtual stuff, and you can't buy real things with them as game companies were allowing to happen, nor can you gamble," Heeks wrote. "This therefore is not about what gold farming clients do: use real money to buy these virtual currencies; it's the mirror image.  And it's not about the major trade in gold farming such as World of Warcraft, which relates to other types of virtual currency.  And it's not about buying/selling in-game items.  And it's not about the power-levelling [sic] of avatars.  Bottom line: it's not about gold farming."

It'd be tough for me to explain it any better than Heeks does, which is why I offered the lengthy quote from his recent blog entry. He analyzes and articulates the reality of the situation more accurately than I've read in a number of news articles and blogs throughout the past week.

However, we're not able to draw a conclusion yet that the new law will have absolutely zero impact on the traditional gold-selling industries, either now or in the future. A recent, informative article at GamePolitics.com researched the issue from a few sources (including Heeks). The article points out that the regulation of the new law may prove difficult for the Chinese government to actually enforce, especially when you consider that some companies or outfits may turn to offshore server hosting.

Indiana University Prof. Edward Castronova suggests that we're beginning to see the first signs of the world's governments recognizing the virtual currency trade's power and influence in the market. When game developers have that much potential influence in a country's economy, is it only a matter of time before all the world's governments step in and demand oversight or regulation?

This might be the first stepping stone in China that leads to a scenario similar to one that so many news sites mistakenly reported; a nation-wide ban on the sale of virtual currencies. Even then, the issue of enforcement and jurisdiction would still apply, making it difficult to predict the extent of the damage such a ban would have on the gold-selling industry as it is today.

For now, it appears gold sellers have escaped regulation. The real issue behind the ban doesn't apply to gold farming and selling as most of us know it. If you're a Chinese citizen who makes a habit of buying or trading a virtual currency like the one mentioned from any other source than the official issuer, you might be affected by the new law. But for everyone else, it's business as usual.