A fully convertible currency, or freely convertible currency, is a currency that doesn't have any government restrictions on currency exchange. Obvious examples of fully convertible currencies are the US dollar and the Euro. In total, there are around 17 fully convertible currencies. There is no precise, straightforward definition of what constitutes as a freely convertible currency. Different institutions have varying criteria.
Advantages of freely convertible currencies
Freely convertible currencies are good news, in that they are very inexpensive to buy and sell. 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%.
Every year, the IMF engages in Article IV negotiations with central banks and governments around the world to determine, based on Article VIII, whether the currency is convertible or not. In addition to that, some currencies may be deregulated by the central bank and guaranteed convertible by the IMF, yet no global banking institutions will want to get involved with it (e.g. the Columbian peso).
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). The only place to exchange these currencies outside of these restrictions is on the black market.
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.
A non-deliverable forward (NDF) contract on non-convertible currencies can be used to attempt to mitigate the currency's volatility risk.
List of non-convertible currencies with an NDF market
- ARS Argentine peso
- BRL Brazilian real
- CLP Chilean peso
- CNY Chinese renminbi
- COP Colombian peso
- EGP Egyptian pound
- GTQ Guatemalan quetzal
- IDR Indonesian rupiah
- INR Indian rupee
- KRW South Korean won
- KZT Kazakhstani tenge
- MYR Malaysian ringgit
- PEN Peruvian nuevo sol
- PHP Philippine peso
- TWD Taiwan dollar
- UYU Uruguayan peso
- VEB Venezuelan bolívar
- VND Vietnamese đồng
Read more about NDF on Wikipedia
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.
We expect that full convertibility of the Chinese Yuan will be off the table until at least 2018.
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.