Tateru wrote:
"Also contracts between two parties are unable to override the operation of criminal law between one of them and a third party."

That is correct, but there's no theft that takes place if you assume the game operator owns everything on its servers. There is no overriding of criminal law in that case.

Further, the very idea that a "virtual sword" should be treated as the virtual equivalent of a real sword is a little silly. Swords in a game are not even objects. They're pointers to entries in a database.
What is it you 'own' if you believe you 'own' the stuff your avatar 'owns' in the game fiction?

Do you own the copyright to the sword's design? No, that's owned by the developer/publisher. Is there a particular set of data in-game that you own, that is separable from the rest of the world? No.
Again, it's just a pointer to a database entry/template.

So what is it you own? The database reference? (Clearly you don't own the database entry itself).

This decision was based on a fundamental misunderstanding of the nature of "virtual items". It's understandable why this kind of fairly naive view might arise (it's probably easier for a judge to think of a virtual sword as an independent "item" because that's what a sword is in the physical world) but that doesn't excuse it.