Freely Convertible Currencies

A fully convertible currency, or freely convertible currency, is a currency that doesn't have any government restrictions on currency exchange. Each currency that is freely convertible can be easily exchanged for gold or another currency. Some of the worlds’ currencies have the status of fully convertible currencies, such as the US dollar and the Euro. For other currencies, the conversion is restricted, regulating the inflow and outflow of the currency from the country. This makes it difficult for a country to participate in a global market, as it takes time to pay for goods with the currency the country issues.
In 2020, there are 17 fully convertible currencies worldwide. Let’s have a look at their role in contemporary trade and finances.

Freely convertible currency list

This is not a canonical list, since various institutions have different definitions of a fully convertible currency

Restrictions on currency exchange

Some countries completely forbid exchanging their currencies beyond a specific amount (e.g. the Cuban Peso and the North Korean Won). In which case, the only place to exchange these currencies outside of these restrictions is on the black market.

Partial restrictions

The Indian rupee is a partially convertible currency. India has put restrictions on trading the rupee. This usually leads to bad exchange rates when transferring money in and out of India. In our experience, these (mostly hidden) fees can add up to 10% at the €2000 bracket.
How do these restrictions apply in real life? For example, anyone willing to purchase goods or assets outside of the country above a certain amount, or anyone planning to invest in India more than a pre-defined amount of money, needs permission from the state in order to do that. The status also means that the currency is not subject to the market-driven exchange rate, and its value is subject to regulatory interventions, preventing it from becoming unstable. Some countries decide to loosen their restrictions on certain kinds of transfers, for example remittances.
On one hand, joining the club of freely convertible currencies would mean that Indian Rupee is a mature currency, able to operate on the free market. It would also improve the financial flow, open new investment opportunities, attract businesses and partners, give India access to preferable loans with lower interest rates. Indian citizens will be able to easily invest and work abroad.

Non-deliverable forward and non-convertible currencies

A non-deliverable forward (NDF) contract on non-convertible currencies can be used to attempt to mitigate the currency's volatility risk. It allows partners to decide on profit or losses for future contracts before a contract can expire. Such settlements take place up to 2 days before the expirations of such contracts. The NDF makes it possible for those using non-convertible currencies to participate in the international market.
Meanwhile, non-convertible currencies cannot be traded on the foreign exchange market. Countries issuing such currencies would block the flow of their money to prevent further destabilization of the markets. In those times, these currencies can only be bought on the black markets. This, in turn, has an impact on the business and international partnerships, making them risky, illegal and difficult.

Is the Chinese Yuan fully convertible?

There's no clear yes/no answer to this. In fact, there are two yuans. Besides the widely known CNY there is the off-shore CNH. CNH is not regulated and is de facto fully convertible. That is, for transactions outside of mainland China, such as in Hong Kong and Singapore. If the transaction involves a party inside China, the regulations set by the Chinese central bank and SAFE, the Chinese Safe Administration of Foreign Exchange, apply.

So, there's still a lot of regulation and restrictions attached to moving CNH from off-shore to on-shore mainland China. Due to the recent economic problems in China, the Central Bank has increased the restrictions. This also means that transferring money into China has become more expensive and cumbersome for banks and companies.
At the moment, it is expected that the Chinese Yuan will become a fully convertible currency by 2021.

Virtual Bank Account: a workaround for Exporters to Europe

When your business is exporting to Europe, the contracts and invoices with your customers are most often set in Euros. The Euro is freely convertible, but during the payment process to your local bank, you're likely to get an exchange rate between 3 and 6% from the mid-market rate. Ultimately, these high spread costs shrink the margins of the exporter. With B2B Pay, you can get a free virtual bank account in Europe which will allow your customers to make a free SEPA payment. B2B Pay will subsequently forward the money to your local bank account for a 1% fee.
If your bank is charging you 4% in spread costs (the difference between the buy and sell rates), you can easily find a specialized broker who will undercut that by at least 50%.

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