Virtual To Real Currency Restriction Risk: China

When operating a business in foreign countries, currency exchange and repatriation risks are added to risk management planning and strategy. While the U.S. Government has made no policy (yet) against currency conversion from virtual to real, China’s Government has. In the article “China bars use of virtual money for trading in real goods“, the official ruling is aimed to prevent a “possible impact on the real financial system”. In a way similar to foreign currency exchanges, virtual to real currency exchanges also have variable exchange rates, commissions, and value-added taxes in many cases. Virtual businesses operating in China can no longer trade virtual currencies, such as those used for online gambling or “pre-paid cards of cyber-games” for real world products and services.

Virtual currencies present a new risk to any financial system. It can allow illegal activity to bypass the exchange of a country’s real currency and regulations. Virtual currencies can be created and destroyed at will by the owning organization, and its value against real currencies adjusted without rule or explanation. Virtual currencies are also not guaranteed to be backed by real assets and again, the owning organization makes no claims to pay should a “run on the bank” occur.

If you are considering doing business in virtual currencies, or are already operating a virtual business, governments are increasing their watch. You are already expected to claim income on your federal tax returns from such operations in the U.S. Let’s hope that governments see the growth in this industry, the jobs it creates through technological innovation, and decide to only put restrictions on virtual to real exchanges without smothering the industry as a whole.