According to Japanese PC game site 4Gamer.net, Sega and its codevelopers have encountered problems with Shenmue Online. The site is reporting sources who claim Shenmue Online's development has stopped at JC Entertainment, a seasoned Korea-based online game maker that has been working on the project since last year. Reportedly, Sega stopped checking on JC Entertainment's development around March, and two months later the project had dissolved. The report goes on to say that Shenmue Online's staff received a statement from Sega saying that the project had been transferred to another unnamed development studio located in Taiwan.

One former employee of Shenmue Online confirmed to 4Gamer that JC Entertainment had not touched the project since the middle of the year. "Shenmue Online's project was canceled [in our company] by May or June. Most of the staff that had previously worked on the project is now working on JCE's online Basketball game FreeStyle, or to other new development teams," said the unidentified source.

Another JC Entertainment staffer said the project had been canceled and that an official announcement could come as early as next week.

Sega commented to 4Gamer that Shenmue Online's development is being entirely managed by its Asian subsidiary Sega Shanghai Software, and the Japanese office has not received detailed information regarding its current status. While Sega of Japan hasn't officially stated that the game's development has been transferred, it has acknowledged that production has been halted at JC Entertainment.

Shenmue Online made its public debut at last year's KAMEX (Korea amuse world game expo) in December. The game was available in playable form at the show, and it featured a similar atmosphere to the original console installments and contained various minigames, including Space Harrier, Hang On, Afterburner, and Casino. JC Entertainment president Yang Shin Kim stated at the time that Sega has been consistently checking every detail on the project to make sure the game played true to the original single-player world of Shenmue.