What Is a Permitted Currency?
A permitted currency is one that is free from any legal and regulatory restrictions that would keep it from being exchanged with or converted into another currency. Countries with permitted currencies benefit from greater access to international trade and global finance.
- A permitted currency is freely exchangeable for other currencies and often actively traded on FX markets.
- Permitted currencies often refer to smaller economies, and so are minor forex currencies.
- Having a permitted currency means it is free from regulations or restrictions that also grant the country greater access to global finance and trade.
Understanding Permitted Currencies
A permitted currency is often a minor currency, but which has a fairly active market for foreign exchanges with major currencies because of a lack of government regulations restricting its trade.
Transactions between a major currency, such as the U.S. dollar, and a permitted currency are smoother than ones between a major currency and a tightly-controlled one because the permitted currency is more liquid. In addition, some transactions require the settlement to be made in a major currency.
Sometimes, government restrictions can result in currencies with a low convertibility or even complete inconvertibility, such as countries with political or economic embargoes or sanctions in place. Currency convertibility refers to how easy it is for a country’s currency to be converted into gold or another currency. Convertibility between different world currencies is often critical to global trade, because in countries that have poor convertibility, transactions don’t run smoothly which can in turn deter other countries from engaging in trade with them.
Permitted currencies and other convertible currencies tend to be highly liquid, which reduces volatility and in turn reduces transaction risk. Convertibility among currencies continues to grow more important as global trade increases.
Permitted Currencies and Government Regulations
Permitted currencies are freely convertible into other currencies without government regulations or restrictions, so authorized dealers sometimes will keep balances of permitted currencies that could be traded on demand.
When countries have permitted currencies or other highly convertible currencies, there is often a direct correlation to the country’s economic activity. This is because currency convertibility is incredibly important to international trade and finance. Currencies that are free from government regulations often also enable businesses to conduct trade across borders and create for transparent pricing. Some examples of currencies that are highly convertible include the South Korean won (KRW), the South African Rand (ZAR), and increasingly the Chinese Yuan (CNY).
The reasons that governments create restrictions on currencies are varied. Sometimes, governments that have low reserves of hard foreign currency restrict currency convertibility. This is because the government would not be in a position to intervene and devalue or revalue the currency in the foreign exchange market if and when necessary.
Generally, authoritarian regimes or developing countries have been more likely to place restrictions on the exchange of currency. This can put these countries at an economic disadvantage since trade is not as smooth. Some countries such as Cuba and North Korea issue nonconvertible currencies, which, unlike permitted currencies or highly convertible currency, cannot be traded for other currencies.