Virtual currency, as defined by Chinese authorities, includes "prepaid cards of cyber-games," according to a joint release issued by China's Ministry of Culture and Ministry of Commerce on Friday.
"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 Ministries said.
The Chinese government estimates that trade in virtual currency exceeded several billion yuan last year, a figure that it claims has been growing at a rate of 20% annually. One billion yuan is currently equal to about $146 million.
The ruling is likely to affect many of the more than 300 million Internet users in China, as well as those in other countries involved in virtual currency trading. In the context of online role playing games like World of Warcraft, virtual currency trading is often called gold farming.
The most popular form of virtual currency in China is called "QQ coins," a form of virtual credit issued by Tencent.com.
Tencent.com, which has about 220 million registered users -- about as many as Facebook -- is quoted in the Chinese government news release as "resolutely" supporting the new rule. The government justifies its ban on virtual currency trading as a way to curtail gambling and other illegal online activities.
The Chinese government, however, appears to be uninterested in regulating sales of in-game items for real cash. A report in the English-language China Daily says that in-game gear is not considered virtual currency, so selling virtual items can be expected to continue.
The trading of virtual currency for real cash employs hundreds of thousands of people worldwide and generates between $200 million and $1 billion annually, according to a 2008 survey conducted by Richard Heeks at the University of Manchester.
He estimates that between 80% and 85% of gold farmers are based in China.
"[M]any online games have a virtual economy and an in-game currency," he states in his survey. "Gold farmers can play in-game to make some currency. They then sell that for real money -- typically via a Web site and using the PayPal payment system -- to other players of the game."
Game companies typically forbid gold farming but committed virtual currency traders find ways around such rules. Some game companies have recognized the futility of trying to ban the practice and have built virtual commerce into their game infrastructure.
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Updates: currency conversion corrected, added China Daily reference, corrected gold farming paragraph and headline.
Editor's note: The former headline, China Bans Gold Farming, was changed because it incorrectly extended the scope of the new regulations to all virtual currency exchanges. The new rules limit official game currencies sold by game operators, but not "virtual network props such as costumes, games, coins, weapons and other props."