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What are Foreign Exchange and Foreign Exchange Legislation?

Published 13 Apr 2022

What are Foreign Exchange and Foreign Exchange Legislation?

What are Foreign Exchange and Foreign Exchange Legislation?

With the globalizing world, the borders of trade have expanded and physical distances have lost their importance. In fact, as we wrote in our previous blog, internationalization and international retailing became one of the building blocks of this globalization. Today, we will discuss the foreign exchange legislation in parallel with this subject.


What is Foreign Exchange?

Many words and terms have roots in Latin. Foreign exchange is one of these terms. It corresponds to meanings such as replacement, exchange and value. The exchange of money or money substitutes includes transactions related to buying and selling. In summary, it is defined as the process of exchanging the currencies of two different countries. While foreign currency (exchange) refers to all kinds of accounts, documents and instruments that provide payment in foreign currency, convertibility refers to the necessity of easily converting national currencies to each other in the free exchange rate system. For example, a free exchange rate system is applied in Turkey. In 1980, Turkey announced that the national currency, namely T.L., is a convertible currency, but for the national currency to be considered convertible, it is not enough for the relevant government to declare its national currency unilaterally convertible. So, what is required for a country's currency to be considered a convertible currency? We itemize below:

-Stable national economy of the country

-No unemployment problem

- Absence of chronic external deficit and public sector deficit

- Having a structure that does not have economic problems

In addition, its national currency must be a generally accepted currency for foreign payments. There are very few national currencies that have such convertibility and are generally accepted in international payments. Such as Swiss Franc, Euro, British Pound, and US Dollar.


What is Foreign Exchange Legislation?

Foreign exchange legislation also expresses all the rules regulating the payments and collections that a country has to make in foreign currency. This type of legislation can sometimes be confused with customs legislation because both legislations play a role in regulating foreign trade. It regulates the points that contradict each other, and the other legislation makes up for the lack of one. However, while the foreign exchange legislation regulates the movement of money in foreign trade, the customs legislation regulates the movement of goods. Here comes the difference between them.


What are the Invisible Transactions within the Framework of Foreign Exchange Legislation?

It covers transactions and payments, which are not related to transactions such as imports and exports, which result in goods movements, and capital flows, but which are indirectly related to these issues, and which involve different stages of social, economic and individual relations.