Fungibility

What Is Fungibility?

Fungibility is the ability of a good or asset to be interchanged with other individual goods or assets of the same type. Fungible assets simplify the exchange and trade processes, as fungibility implies equal value between the assets.

Understanding Fungibility

Fungibility implies that two things are identical in specification, where individual units can be mutually substituted. For example, specific grades of commodities, such as No. 2 yellow corn, are fungible because it does not matter where the corn was grown; all corn designated as No. 2 yellow corn is worth the same amount. Commodities, common shares, options, and dollar bills are all examples of fungible goods.

Cross-listed stocks, which refer to the shares of stock listed on multiple exchanges are still considered fungible. The shares represent the same ownership interest in a firm, whether you purchased them on the New York Stock Exchange or the Tokyo Stock Exchange. Although fungibility is commonly associated with finance, it is also found in other disciplines, such as quantum physics.

Although cryptocurrencies are generally considered fungible assets, some are unique and not interchangeable (e.g., non-fungible tokens [NFT]).

Fungibility vs. Non-Fungibility

Another example of a fungible asset is money. If Person A lends Person B a $50 bill, it does not matter to Person A if he is repaid with a different $50 bill, as it is mutually substitutable. In the same sense, Person A can be repaid with two $20 bills and one $10 bill and still be satisfied, since the total equals $50.

Conversely, as an example of non-fungibility, if Person A lends Person B his car, it is not acceptable for Person B to return a different car, even if it is the same make and model as the original car lent by Person A. Cars are not fungible with respect to ownership, but the gasoline that powers the cars is fungible. Assets like diamonds, land, or baseball cards are not fungible because each unit has unique qualities that add or subtract value.

For instance, because individual diamonds have different cuts, colors, sizes, and grades, they are not interchangeable, so they cannot be referred to as fungible goods. Real estate is never genuinely fungible. Even on a street of identical houses, each house experiences different levels of noise and traffic; is in varying states of repair; and has unique views of surrounding areas.

Special Considerations

The line between fungibility and non-fungibility may be a thin one. Gold is generally considered fungible (one gold ounce is equivalent to another gold ounce), though in some cases, it is not. When otherwise fungible goods are given serial numbers or other uniquely identifying marks, they may no longer be as fungible. Adding unique numbers to bars of gold, collectibles, and other items makes it possible to distinguish them.

The Federal Reserve Bank of New York offers gold custody services to central banks and governments around the world by storing gold bars in its underground vault. All of the gold bars deposited into the vault are weighed with precision, and the refiner and purity markings on the individual bars are inspected to confirm they match the depositor instruction sheets. All of this is carefully monitored and recorded, and since the exact bars deposited to the New York Fed are the exact ones returned upon withdrawal, these types of gold deposits are not considered fungible.