A non-convertible currency is commonly known as a “blocked currency.” It refers to a currency that is not easily exchanged or traded on forex markets. 

When a nation’s currency is non-convertible, it tends to limit the country’s participation in international trade.

It is mostly used primarily for domestic transactions and is not openly traded in the forex market.

This is usually the result of government restrictions, which prevent it from being exchanged for foreign currencies.

Here’s a breakdown of the key characteristics of a non-convertible currency:

• Restricted Exchange: Regulations prevent holders of the currency from freely converting it into other currencies at the official exchange rate.
• Limited Use: Limitations restrict the currency’s use for all purposes; it is often restricted to domestic transactions within the issuing country.
• Exchangeability Issues: Restrictions prevent the currency’s exchange for another currency without limitations.
• Market Value Uncertainty: Market conditions may prevent the currency from being easily exchanged at a given exchange rate.

Non-deliverable forward (NDF) and Non-Convertible Currency

A cash-settled, typically short-term forward contract is known as a non-deliverable forward (NDF). The term “non-deliverable” comes from the fact that the notional amount is never exchanged.

For offshore or foreign investors seeking to engage in exchange with country that have non-convertible currencies, they must do so through the use of a financial instrument known as a non-deliverable forward (NDF).

It has no physical exchange in the local currency. Instead, the net of the cash flows is settled in a convertible currency, usually the U.S. dollar, which gets around the non-convertibility of the domestic currency.

Countries with currency that are non-convertible

Notable non-convertible currencies include the Brazilian real, South Korean won, Indian rupee, Chinese renminbi, and new Taiwan dollar.

Despite the fact that their currencies are officially free to fluctuate on international exchange markets, many South American nations’ currencies are nonconvertible due to historical excess economic volatility.

Related Term

Currency Spot Rate

Cash Market