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Iceland: Central Bank Eases Currency Restrictions, Ends Financial Crisis Capital Controls

(May 16, 2017) On March 12, 2017, the Icelandic Central Bank announced that it had adopted new currency exchange rules and entered into agreements to purchase Icelandic krónur from foreign holders. (Central Bank of Iceland Concludes Agreement with Owners of Offshore Króna Assets, ICELANDIC CENTRAL BANK (Mar. 12, 2017); New Rules on Foreign Exchange, ICELANDIC CENTRAL BANK (Mar. 12, 2017).)

The move repeals most of the capital controls that the Icelandic Central Bank put in place in the wake of its 2008 financial crash. (See Elin Hovferberg, Iceland: Easing of Capital Controls and Banking Regulations, GLOBAL LEGAL MONITOR (July 16, 2015).)  The new currency exchange rules took effect on March 14 and will mostly allow Icelandic krónur to be transferred freely.  (Rules on Foreign Exchange (Mar. 12, 2017), ICELANDIC CENTRAL BANK.)

Under an initial agreement with foreign holders, the Icelandic Central Bank bought one billion offshore Icelandic krónur (ISK) (about US$9,450,000, at an exchange rate of 137.5 per €1 (about US$ 1.1)). On April 4, 2017, the Icelandic Bank announced that it had offered to buy offshore krónur (not previously purchased through the one billion agreement) at the same exchange rate, provided the terms were accepted  and the transfer requested prior to April 28, 2017.  (Purchase of Offshore Krónur by the Central Bank of Iceland, ICELANDIC CENTRAL BANK (Apr. 4, 2017).)

Certain Restrictions Still in Force

While most capital controls have been lifted, certain regulations will remain in force.  According to the Icelandic Central Bank, restrictions on so-called offshore króna assets, and special reserve requirements for specified investments in connection with new inflows of foreign currency, will remain in place.  (New Rules on Foreign Exchange, supra.)  For example, the requirements to notify the Icelandic Central Bank of international purchases of Icelandic krónur or derivative transactions are still in force as are the rules requiring a special reserve when there is an inflow of a foreign currency into Iceland.  (Rules on Foreign Exchange, arts. 12, 14, & 17; Rules on Special Reserve Requirements for New Foreign Currency Inflows, No. 490/2016 (June 4, 2016, as amended), arts. 3 & 8, ICELANDIC CENTRAL BANK; Rules Amending the Central Bank of Iceland Rules No. 490/2016 on Special Reserve Requirements for New Foreign Currency Inflows, with Subsequent Amendments (Mar. 12, 2017), ICELANDIC CENTRAL BANK.)  Restrictions will also remain in place on ”i) derivatives trading for purposes other than hedging; ii) foreign exchange transactions carried out between residents and non-residents without the intermediation of a financial undertaking; and iii) in certain instances, foreign-denominated lending by residents to non-residents.” (New Rules on Foreign Exchange, supra.)

The European Free Trade Association (EFTA) Surveillance Authority (ESA) has examined and made a ruling on the permissibility of the prohibitions, and in 2016 ESA made a determination on whether the Icelandic capital controls were allowed under the European Economic Area (EEA) Agreement and found that the controls were consistent with the EEA Agreement. (Press Release, EFTA Surveillance Authority,  Internal Market: Iceland’s Restrictions on Offshore Króna Markets Are Not in Breach of the EEA Agreement (Nov. 23, 2016); EFTA Surveillance Authority Decision of 23 November 2016 Closing a Complaint Against Iceland in the Field of Free Movement of Capital (Capital Controls), Case No:79250, Document No. 821093, Decision No. 207/16/COL (Nov. 23, 2016).)