QQ Coin Challenges People's Bank of China
Tencent QQ, founded in 1998 November, has been generally accepted as China's most popular instant messaging service and considered to be the world's third most popular IM service. Tencent provides online service similarly to ICQ and MSN Messenger, including instant message communication, online voice calls, video calls and virtual online community. In addition, Tencent has developed some its original features like QQ Pets, QQ Coin, QQ Shopping, QQ Game and so on. Since its entrance into Chinese households QQ quickly emerged as a modern cultural phenomenon, now being regarded as an essential part of Chinese popular culture 1 .
Tencent introduced the coins in 2002 as tokens to pay solely for its online services and disavows any connection with this illicit trade. Users can buy QQ coins for a fixed price of one RMB per coin from Tencent. The coins can be used to pay for premium features, such as decorations for a chat avatar. Coins can also be transferred to other users. In addition to the official premium content offered by Tencent, third parties have begun accepting QQ coins as a method of payment for their services2.
Trading companies buy coins from parties that accumulate them, and sell the coins back to users for slightly less than Tencent's official rate. Thanks to the official premium content, some coins are constantly drained from circulation, making sure new coins must always be bought from Tencent.
Tencent did not take a hostile attitude towards this business ecosystem that had grown around its service. It is a symbiotic relationship: more third party services mean more coins are needed for circulation. Tencent boasts more than 220 million users, and its QQ coins can be purchased with a bank, telephone or "QQ" card at an official price of 1 yuan (12.5 cents) per coin. Originally, the virtual coins were designed to pay for Tencent services such as electronic greeting cards, online games and anti-virus software. Now, however, they have reportedly developed into an alternative currency traded on the black market and used for other, less savory services, such as online gambling and private chats with "QQ girls".
Xinhua, China's official news agency, reports cases of people earning thousands of yuan per month trading in QQ coins, which they can win by playing online QQ games that pay out one coin for every 10,000 points earned. Xinhua also reports that the operators of some Internet forums are now paid in QQ coins rather than the official currency. And there is evidence that other online sites not associated with Tencent also accept QQ coins.
In addition, unofficial online vendors have sprung up to take advantage of QQ fever. They accumulate large numbers of coins by hiring professional game players to win them and also through gambling ploys, inside connections at entertainment companies and even by hacking into user accounts and simply stealing them. Then they sell the virtual currency below its official value, at a rate of 0.4-0.8 yuan per coin1.
Tencent introduced the coins in 2002 as tokens to pay solely for its online services and disavows any connection with this illicit trade
Virtual Bank of China?
According to one government estimate, the total volume of trading in virtual items in China last year was worth about $900 million. About 45% of that went for items in the Tencent world.Online game sites beyond Tencent started accepting QQ coins as payment. The coins appeal as a safer, more practical way to conduct small online purchases, because credit cards aren't yet commonplace in China2.
At informal online currency marketplaces, thousands of users helped turn the QQ coins back into cash by selling them at a discount that varies based on the laws of supply and demand. Traders began jumping into the QQ coin market as an opportunity to make a quick yuan off of currency speculation3.
State-run media reported that some online shoppers began using QQ coins to buy real-world items such as CDs and makeup. So-called QQ Girls started accepting the coins as payment for intimate private chats online. Gamblers caught wind, too, and started using the currency to get around China's anti-gambling laws, converting wins in online mahjong and card games back into cash2. Dozens of third-party trading posts sprouted up to ease transactions, turning the QQ coin into a kind of parallel currency.
Senior officials from People's Bank of China have shared their serious concern on Tencent's online business ecosystem. People argue that the central government should act to limit the applications of QQ coin and force Tencent to assure that the use of virtual currency is restricted to virtual world.
"The People's Bank of China will strengthen management of the virtual currencies used in online games and will stay on the lookout for any assault by such virtual currencies on the real economic and financial order."
Statement From China's Central Bank
Overact or Not?
Tencent says it never aimed to mint money and says the company doesn't consider QQ coins to be virtual currency. "We agree that we should prevent online virtual money from being used illegally, such as for money-laundering. But QQ coins are not anything like that," says a company spokesman1.
Nonetheless, Tencent is stuck cleaning up a very real mess. It sued one of the country's top online auction sites, Taobao.com for allowing the sale of QQ coins on the Web site at market prices. The case has been accepted by the court and is now being considered.
Tencent also responded to the government pressure by cutting the amount of coins users can transfer from one person to another, and shutting down its service for exchanging game wins into QQ coins, drying up liquidity in the market.
Legal Issues and Third-party Analysis
In February, five Chinese Internet companies including Tencent issued a joint statement urging the government to regulate the game-credit and virtual-property trade. "The problem is that the auction sites sometimes serve as channels for the sale of stolen game and instant message accounts," the companies said.
Tencent estimated that they could lose tens of millions of yuan every year due to stolen QQ coins and other crimes.
"One thing for sure is that the regulators want to control the impact from virtual currency, but in the meantime, they don't want to hurt outstanding companies like Tencent, who have been running really well in all other sectors and have been contributing to the economy, but it could take the policy makers and legislators years to enact a law."
Liu Bin, an analyst at BDA China
The trouble starts when a virtual currency that isn't backed by a trusted government, becomes linked to a real one that is through an exchange rate. Virtual currency brokers call that RMT, or real-money trade. When that happened to the QQ coin, it effectively turned into a parallel currency operating alongside the yuan.
The creation of too many QQ coins , could, in theory, create a surge in China's total money supply, leading to inflation. While few think a QQ monetary crisis is likely, assessing the economic impact is difficult because Tencent won't say how much QQ coin is in circulation.
Yiping Huang, the chief Asia economist of Citibank.
- QQ: China's New Coin of the Realm?-The Wall Street Journal
- Asia Times Online- China's Virtual Currency Threats the Yuan
- Coin of the Realm, Revisited