Last month I blogged about how the virtual Q Coins are being traded for real money and used as an online payment system in China, and how the Chinese government has reacted to this. In the comments section, one Boaz Rottenberg provided some additional details and also offered some disagreeing views. In particular, he wrote:

There is no secondary trade going on in Q Coins in the open market. The currency itself is not transferable through QQ’s platform and definitely not cashable by QQ. [...] From my findings, I believe all real money trade in virtual currencies in China is in gaming currencies – mainly WoW gold.

In this posting, I describe how Q Coin secondary market trading (or one facet of it) works in practice, and illustrate the process with some screenshots. I also provide some figures from a trading site. Many people have seen the news articles about QQ, but for most non-Chinese speakers, this is probably the first glimpse of the actual Q Coin market.

Taobao: the eBay of China

First, I will address another part of Mr. Rottenberg’s comment:

Regarding the sale of Q Coins on Taobao: From a look at the listings on the site (over 10,000 last time I looked) it appears that the vast majority of the listings are in fact Q Coin top-up cards (or top-up card numbers and passwords) sold at a discount by top-up card vendors or by other QQ users who have extra top-up card credits on their card that they choose not to use themselves.

Taobao is a popular Chinese auction site, similar to eBay, that is a favorite marketplace for Q Coin trading. While eBay no longer tolerates unsanctioned virtual currency trading, Taobao even has special sorting options to support such transactions. There are three types of Q Coin listings:

1. Actual Q Coins
2. QQ prepaid (i.e. top-up) card number and password
3. QQ accounts with Q coins included.

On April 9, 11:04, Taobao reported 26415 Q Coin listings. Their distribution was as follows:

At least on this day, it thus looks like the vast majority of listings are in fact not prepaid (top-up) cards, but actual Q Coins.

Sorting the offers

To understand the trading process, it is useful to note that the listings can be sorted on three other dimensions: price interval, transfer speed and block size. Block size is familiar from eBay or IGE transactions, but the speed at which the transfer can be executed is not normally an explicit dimension in Western virtual currency marketplaces. There are two categories:

In theory, the slow transfers enable sellers to “sell short” if they believe the overall price will go down within the next few days. Slow transfers naturally tend to be cheaper. Sorting by block size yields the following results:

After the recent announcements by Chinese government bodies, Tencent instituted a 120 Q Coin limit for the amount each account holder can purchase within one calendar month.

Sorting by price interval, we get the following distribution of listings:

The approximate average price is:
(1122*0.55+1222*0.65+1577*0.75+1590*0.85+0.95*4423) / (1122+1222+1577+1590 +4423) = 0.82 Yuan / Q coin

Purchasing Q Coins: illustrated edition

To illustrate the process of purchasing Q Coins for real money, I carried out an actual transaction and took some screenshots. Taobao is not the only marketplace for Q Coins and within Taobao there are many options, but the following describes one typical way.

Let’s say I want to buy 10 Q Coins that are transferred to my personal QQ account quickly. First I need to choose the listing type. I don’t want a prepaid card or a new account, so I choose what we above referred to as actual Q coins:

There are 20638 such listings at this time. Next I choose the price interval I am willing to pay: 0.7 – 0.8 Yuan per Q Coin. There are 1545 matching listings:

I would like to buy a block of 10 Q Coins. There are 310 such blocks for sale:

Finally, I choose a fast transfer, and select one seller at random out of several who match my criteria:

I click on the listing to see information about the seller and detailed transaction instructions. I can see the seller’s trading history, reputation in the view of other users, and contact information. Like most sellers on Taobao, the one I chose accepts three types of payment methods:

Basically, the types are 1) Alipay (Zhifubao); 2) online bank transfer; and 3) post office remittance. Alipay is very similar to and the main competitor of Paypal in China. Alipay and Taobao belong to the same Alibaba group, so a Taobao account can be linked with an Alipay account for easy purchases. An Alipay account can be funded from a Chinese bank account, a debit card or a credit card.

Since I don’t have an Alipay account (actually a card you have to pick up at a Chinese bank) and currently live in Finland, none of the payment options are readily available to me. I therefore had to ask a friend with an Alipay account to help. She carried out the payment and indicated my QQ account number to the seller.

On the same day, an unfamiliar QQ account number added me to his friend list, and I received 10 Q coins from him as a “gift”. These transfers can be executed using the transfer feature available on Tencent QQ’s website:

Using this interface you can either send coins or request the other party to send you coins. It only works between “friends”, but there is no limit to whom you can add to your friends list.

I also contacted the person who sold me the coins to ask more about Q Coin transfers. He said he could offer me a QQ account number and password, containing the exact number QQ coins I bought, and I could get the Q coins out myself after I paid the money within some limited time. He also told me that after the government regulations, QQ game coins (a currency different from Q Coins) that players won or had stored in Tencent’s game platform could be no longer redeemed for Q Coins after the beginning of May.

Conclusions

While I agree with Boaz Rottenberger in that Q Coins are not redeemable by Tencent itself, he seems to have mistaken in the proposition that Q Coins are not transferable through QQ’s platform. They are, as demonstrated above, and this enables a secondary market for the currency to emerge (the primary market being sales of Q Coins by Tencent to users).

Another take-away from the observations of this post could be on market efficiency. Virtual currencies are supposed to be a perfect commodity, so why is there such a large spread of prices on the market? Why doesn’t arbitrage force the prices to converge? This is a complicated topic, but one possible explanation suggested by the observations above is that while the currency itself is a perfect commodity, the complete good of purchasing a coin and having it delivered to you involve a lot of differences in quality. One coin is actually not as good as the other. A related possibility is that some QQ accounts and Q Coins are actually stolen property, obtained by hacking someone’s account. The sellers want to get them out of their hands as soon as possible, thus offering bargain prices.

Another always pertinent cause for market inefficiency is of course transaction costs, which we also witnessed in various forms.

Vili Lehdonvirta also contributed to this article.

A couple of weeks ago it was reported (via PlayNoEvil) that China aims to restrict the trading of virtual currencies that have become popular as a payment method even for third-party services. According to the joint announcement of 14 Chinese government agencies including the Ministry of Public Security and People’s Bank of China, virtual currencies should not be used to buy real commodities and can only be traded back to real money for amounts not exceeding the original purchase price, eliminating any opportunity for profits.

This is the most severe notice so far in a series of growing government attention to the use of virtual currencies and real-money trade of virtual property in China. At the time of writing, however, RMT markets seem to be operating as usual. For example, Taobao lists thousands of sell offers for Q Coins, the virtual currency of Tencent QQ. I dug a little bit into Chinese language sources to find out more about what’s going on.

The government announcement does not contain any new laws or regulations, but rather a notice that existing regulations will be enforced. It sounds serious: People’s Bank of China will from now on enforce governance over virtual currencies in online games. There will be strict limits on the volumes of virtual currencies issued by operators and the amounts purchased by consumers. Virtual item trading should be clearly distinguished from e-business transactions, and virtual currencies should not be used to buy real commodities, only virtual goods and services provided by game operators who issue the currencies. The redemption of virtual currencies for value exceeding their original purchase prices will be banned to prevent attempts to realise profits. According to the notice, violators will be subject to prosecution for financial crimes detailed in China’s banking law.

The Chinese government is definitely taking RMT seriously. But how has the market been affected since this notice was published two weeks ago? So far, no secondary markets have been shut down because of the notice. Some third party auction operators said that so far, they have not received any detailed requests from the related government bodies, so the content and functioning of their websites has not been changed. No transactions of virtual currencies have been taken down.

In the online forums and BBSs of the trading sites this notice became a hot topic. Many people expressed their views and wishes on the matter (my translations):

“It could be pretty hard for the government to control this. The notice banned the activity of exchanging virtual currency for profit, and the redemption value of virtual currencies should not exceed original purchasing prices. But what is the definition of profit here? How can the government track the original purchasing prices? This notice is too equivocal,” wrote one commentator.

Some saw the move as negative thing for the development of virtual economy: “For an emerging, developing game industry, this notice would definitely be a heavy shock. It is not wise to directly ban these transactions without understanding their real effects on the economy; we could take advantage of virtual currency, make it more healthy and transparent. Intelligent guidance and regulation could be much better than just forbidding”.

Other comments included the following:
“It’s a signal from the government but not the law.”
“It could end up being just like some earlier notices from the government that are soon forgotten.”
“Where is demand, there is a market. The government has a policy, the people have their own ways.”
“This notice is just a shot at Q coin,” referring to the dominant virtual currency.

“I will probably lose my job!” wrote a gold farmer.

I am guessing this notice could be regarded as a test to see how people would react to regulation, and also as a way to cool things down to win some time to examine the effects of virtual currencies on the financial system before the phenomenon becomes too large to control. According to some observers, the market for virtual currencies is growing by 20% per year. There are at least 10 virtual currencies, including Q coins, Baidu coins and gold coins from MMORPGs like WoW. Together they amount to billions of Yuan in value. I suspect the government will find it necessary to try to restrict the liquidity of the virtual currency markets further in the near future.

Vili Lehdonvirta also contributed to this article.

A worm virus (targeted to steal passwords for the ubiquitous QQ service and other game accounts)with the logo of Xiongmao Shaoxiang (Panda burns joss-sticks), has hit millions of computers in China since November 2006. According to Xinhua, BEIJING, Feb. 13 Police Monday arrested eight suspects involved in producing and disseminating a severe computer virus. It was the first case related to the spreading of computer viruses in China. The virus writer programmed the virus on Oct. 16, 2006, and made more than 100,000 yuan (13,000 U.S. dollars) selling it to over 120 people via the Internet both himself and through agents. In my opinion, it would alarm everyone who cares about the security of the online property. Up to now, commercial virus development scales much better than the current security countermeasures. The huge illegal profit stimulates such net hacker to steal in a scale.

As Vili introduced before, Tencent QQ is the dominant form of instant message for online communications in China. It supports instant messaging, games, and other value-added services, all of which are paid for with Q-coins. With the usage of Q-coin, you can buy everything from QQ sausages and clothing to QQ credit and debit cards, which builds the QQ virtual world. According to Virtual China, there is a new QQ service called iTQQ. Tencent has partnered with TCL to produce a low-cost some kind of IPTV that provides access to QQ services as well as TV programmes through a new service called iTQQ. Nowadays the online PCs are still out of reach for some Chinese at home, this new service could further increase online activities for Tencent since the Internet can be always available at home. As a result, Tencent will further expand QQ’s dominance for communications and expand the usage of Q-coins to pay for that new value-added service.