NOTICE: I know many int’l investors, game industry professionals, analysts will find this text relevant to their interests. The purpose that I publishing this blog is trying to share the true and firsthand regulation info to non-Chinese speakers. There are obviously lot of misunderstanding and mistakes about the industry regulation environment in China game market, especially on English media. Please note that this translation analysis is just for information sharing purpose, the author will not responsible for any consequences of readers’ business decision based on this text, if you want to contact the author, please email to horace.xiong at Gmail.com
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On June 26th 2009 China Culture Ministry published a Notice regarding online games virtual currency regulation. Click here to see the Chinese official version. Following is my full text translation:
Most important clauses in red and Horace’s analysis in blue.
A. Market entity regulation:
1. Definition: The Online game virtual currency(referred as “virtual currency”) are countable virtual token/credit issued by game operators, bought by game players with real money(RMB), stored on billing system of game operators in digital format. Virtual currency are consumed by players to buy online gaming service provided by game operators. It exist as online game prepaid card, prepaid amount or points, but NOT as in game item.
(Horace: so what this regulation will talk about is “service credit/point issued by game operator that can be bought by customer using real money, it’s not about ingame currency like Gold in WoW. You may feel strange why they don’t include ingame currency to the definition. The reason is because ingame item/currency is a too big(complicated) thing for government to regulate in current status. It involved with too many sophisticated fields and regulating departments. So the government choose to start with a smaller definition. But this definition missed one thing: what if game publisher allow players to use the points to buy ingame stuff?—-actually that’s what most micro translation game do. They all have 2 type of currencies in game, one is old style ingame currency, the other is credits exchanged/bought with RMB at a fix rate. Some salable ingame items have 2 price tag, the other only have one. This regulation won’t talk about this, which leave more uncertainties for the future)
2. Market Entry Conditions: “Online game virtual currency issuing service” and “Online game virtual currency exchanging service” are two different type of services. Entities want to provide these two type of service to customers should submit application to province level culture administration department. After initial review, the province level culture administration department should submit the application to Culture Ministry for approval. “Online game virtual currency issuing service” means game operators issue virtual currency that can be used by customers on their own gaming platform; “Online game virtual currency exchanging service” means a service provider build a platform to facilitate exchange activities among users. One entity should not provide these two services at the same time.
(Horace: These rules raise the entry barrier for game operator who want to establish virtual currency/point on their operation platform. Besides, by making it clear that one company can’t have two business at same time, China government, for the first time, officially recognized the legal status of many virtual currency exchange service providers like 5173.com, even though they didn’t mention “ingame item exchange” here. Such administration style exist widely in China: the authority will not say I encourage (or don’t allow) you to something, but only say you have to submit the application before you want to do it. Of course another reason government don’t allow one company to provide both issuing and exchange/trading service is to create a shield between these two behavior. Well, publishers can still bypass this restriction by setting up two independent companies. Another controversial issue is: How culture ministry can regulate this? These are definitely not “culture activity”, but more like “monetary or financial activities”. Who give them the administration authority to regulate monetary activities. China Central bank seemed to be a proper regulator in this field. My guess is Culture Ministry just pick it up as a big pie for their own interests while China Central Bank is busy enough managing real banks)
3. Online game virtual currency issuing service provider should prepare following extra information when submitting application documents:
- Virtual currency format(i.e.: in what way it exists);
- Issuing scale;
- Unit price;
- Termination method (how player can get refund when the service terminated);
- Payment method(cash, bank card, online payment and such);
- User right protection terms;
- User account and genuine name bank account binding information;
- Technical security protection terms;
(Horace: the purpose of these data requirement are mainly for risk control and user right protection. Some insider said the China central bank might even ask virtual currency issuer to pay deposit reserve (very similar to how real bank works) to make sure when the publisher bankrupt, customers can get refund.)
4. Online game virtual currency exchanging service provider should prepare following extra information when submitting application documents:
- Platform model;
- Payment method(cash, bank card, online payment and such);
- User right protection terms;
- User account and genuine name bank account binding information;
- Technical security protection terms;
5. Enterprises already involved in these business, should submit related operation information to culture administration department within 3 months.
B. Issuing & trading regulation, market risk control.
6. Online game operator should issue virtual currency properly according to business operation status and product condition. Issuing excessive amount of virtual currency to collect real money is strictly prohibited. Online game operator should submit total virtual currency scale information to province level culture administration department quarterly.
(Horace: this will force publishers to reduce activities like selling too much prepaid card to take advantage of the abnormal cash flow. By review all report, regulator will know the overall status of their operation)
7. Real money purchase should be the only method that game operator provide virtual currency to its customers. Game operator should not provide virtual currency to its customers in any other way. Service provider should store user transaction record for at least 180 days.
(Horace: this endeavor is trying to stabilize the exchange rate of virtual currency and real money. Publishers in the future should be more careful when planning any promotion plan or discount activities. In operation practice, this can be violated very easily)
8. Virtual currency’s usage should be limited to purchasing issuing entity’s own virtual service. It should not be used to buy any real physical product or service from other companies.
(Horace: basically this is the second important clause in this notice. It wipe out the dreams of many big publishers who plan to make their virtual currency become hard currency across the whole internet ecosystem. For some of them, like Tencent’s Q-money, already became universal currency on internet. You can use it to buy all kinds of stuff and service on China internet, including webcam strip dance. (10-20q for 20mins btw) 
9. Online game operator should prepare necessary petition channel and customer service procedure to protect user’s legit right. Such information and channel should be presented expressly on the service official website.
10. If there is any dispute, user should present effective ID information as the same with registration profile. Online game operator should provide virtual currency transaction and transfer record after ID authentication, and proceed with petition handling procedures. Whenever user’s legit right are infringed, online game operator should cooperate to provide evidence and help to resolve the problem.
(Horace: these is quite time consuming effort for publishers to keep all these data and provide timely feedback. Basically the government are loading more responsibility to publisher as policeman when dispute arises.)
11. When online game operator plan to terminate the product operation or service, it should publish the notice 60 days before the termination date. Upon service termination, online game operator should refund the unconsumed virtual currency to user in cash or ways that accepted by users. Online games that are inaccessible by user over 30 consecutive days because of technical problem or business operation, can be recognized as “terminated”.
(Horace: previously there was no written requirement for online game service termination reorganization or refund arrangement or time limitation, this clause set the first government guideline. The most obvious impact is it will speed up the death of some underperformed product. i.e.: game publisher should refund the prepaid money to players if the sever is down for consecutive 30 days.)
12. Online game operator should not change the unit price of virtual currency. If want to issue new type of virtual currency, game operator should submit application files to regulator according to clause 3.
(Horace: so the price for one virtual currency is fixed since beginning, which means temporary promotion or discount is not allowed)
13. Online game operator that doesn’t support virtual currency exchange/trade function, should use technical procedure to make it impossible for use to transfer virtual currency between accounts.
14. Online game virtual currency exchanging service provider should require virtual currency seller to register with effective ID, and bind their account with domestic real currency bank account under same genuine ID. All exchange/trade transaction record should be kept for at least 180 days after the transaction date.
(Horace: these requirements can’t be achieved easily for most virtual currency exchange/trade service providers.)
15. Online game virtual currency exchanging service provider should establish illegal transaction tracking system and technical procedures. Once the trading parties are found or reported to be illegal(like the source of the virtual currency is suspicious), the trade/exchanging service provider should delete the trade order and terminate the service for the seller.
16. Online game virtual currency exchanging service provider should not offer service to people under 18 years’ old.
(Horace: can’t be achieved easily given current ID authentication environment)
17. Online game virtual currency issuing service provider and Online game virtual currency exchanging service provider should take necessary endeavor to protect user’s personal information security, and provide necessary data and cooperation when government department take any investigation according to law.
18. Online game operator providing virtual currency transfer between users should keep transaction record for at least 180 days.
C. Ban on gambling and other crime activities using virtual currency.
19. In coordination with public security ministry and culture ministry, all service providers should not allow any gambling activities using virtual currency.
20. If customers already spent real currency to buy virtual currency issued by game operator, game service provider should not use random distribution method like drawing lots, betting, or Roulette-like mechanism to give in game item or virtual currency to players.
(Horace: this is the most important clause in this regulation. For most free-to-play micro transaction based products, this is the key feature to stimulate the consumption. i.e.: some product can get 60m rmb revenue a month from such features solely. Its impact can be found on the stock price of many listed China publishers, their share price drop significantly recently. Like Giant from 8.75$ to 7.5$. It predicted that revenue of games with such features will drop 5-10%. For self-developed titles, it’s easier for the publisher to remove these features and modify the game; for licensed product it will take longer time. Well this restriction can also be bypassed in many ways. i.e.: it only prohibit gambling activity if you directly use real or virtual currency as “chip”. but game publishers can modify the game that you can use ingame item as chip to get other type of ingame item.)
21. Online game virtual currency issuing and exchange/trade service provider should cooperate with related government departments to crack “game account theft”, “game illegal server” and “game illegal software(like unauthorized macro tools)”.
22. If any website use online payment service for illegal privacy server or unauthorized macro tool sales, Culture Ministry will notice such cases to China Central Bank.
D. Punishment and Market Regulation.
23. Entities providing virtual currency issuing and exchange/trading service without government approval and authorization will be cracked down by province level culture administration department according to related rules.
24. Entities violate this regulation will be notified by culture or commercial administration department and should fix the violation within given timeframe, or will be cracked down by related departments.
25. All departments should establishing online game virtual currency management collaboration mechanism and strengthen regulation capabilities against “game account theft”, “illegal piracy server”, “unauthorized macro tool”, illegal activities like monetary laundry. All parties should communicate and cooperate regularly to share the information and improve the virtual currency regulation work.
26. Virtual currency issued by online game operator should not have the same name with ingame item. Online game ingame item regulation will be defined and published by central government separately in the future.
(Horace: interesting,I felt this one was added just for one case in last minute)
China Culture Ministry & China Commerce Ministry
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NOTICE: I know many int’l investors, game industry professionals, analysts will find this text relevant to their interests. The purpose that I publishing this blog is trying to share the true and firsthand regulation info to non-Chinese speakers. There are obviously lot of misunderstanding and mistakes about the industry regulation environment in China game market, especially on English media. Please note that this translation analysis is just for information sharing purpose, the author will not responsible for any consequences of readers’ business decision based on this text, if you want to contact the author, please email to horace.xiong at Gmail.com
