Currency substitution

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Currency substitution, also known as dollarization, is the use of a foreign currency in parallel to or instead of a domestic currency. Currency substitution can be full or partial. Full currency substitution can occur after a major economic crisis, such as in Ecuador. Some small economies, for whom it is impractical to maintain an independent currency, use the currencies of their larger neighbours; for example, Liechtenstein uses the Swiss franc. Partial currency substitution occurs when residents of a country choose to hold a significant share of their financial assets denominated in a foreign currency or use it as exchange currency, as is currently the case in Venezuela. It can also occur as a gradual conversion to full currency substitution; for example, Argentina was in the process of converting to the U.S. dollar during the 1990s.

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