A blocked currency, also known as a “non-convertible currency” or “restricted currency”, is a currency that is subject to governmental restrictions and is not traded in the foreign exchange market, meaning its use is predominantly limited to domestic transactions.
There are diverse reasons why governments restrict the use of their currencies, but a common one is to guarantee a degree of stability in the value of the currency. This is because fluctuations in the exchange rate could lead to trade imbalances, which could, in turn, have devastating consequences for fragile economies.
These are some of the most common restrictions affecting blocked currencies:
- Banning or limiting purchases of foreign currency within the country
- Banning or restricting the use of foreign currency within the country
- Setting exchange rates (instead of letting the value of the currency fluctuate according to market forces )
- Restricting currency exchange to retailers approved by the government
- Limiting the amount of money that may be imported or exported
Blocked currencies often pose additional challenges for international companies, as the controls enforced by the authorities may hinder cash transactions and make it impossible to use financial instruments such as currency options or forward contracts to hedge FX risk.
Want to learn more? Go to restricted currency