Fungibility: What It Means and Why It Matters

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 because fungibility implies equal value between the assets.

Understanding Fungibility

Fungibility implies that two things are identical in specification. Individual units can be mutually substituted. Specific grades of commodities such as No. 2 yellow corn are fungible because it does not matter where the corn was grown. All corn that's 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, or the shares of stock listed on multiple exchanges, are still considered to be 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.

Fungibility is commonly associated with finance but it's also found in other disciplines, such as quantum physics.

Fungible vs. Non-Fungible

Fungible assets are of like kind, which makes them interchangeable. Non-fungible assets, on the other hand, have something unique about them that means one cannot be replaced by another.

Money is another example of a fungible asset. It doesn't matter to Person A if they're repaid with a different $50 bill if Person A lends Person B a $50 bill. It's mutually substitutable. Person A can be repaid with two $20 bills and one $10 bill and still be satisfied because the total equals $50.

Conversely, it's not acceptable for one person to borrow a car from another person and then return a different car, even if it is the same make and model as the original. This is an example of non-fungibility. Cars aren't fungible with respect to ownership, although the gasoline that powers the cars is. Other examples of non-fungible assets are:

• Diamonds: Individual diamonds have different cuts, colors, sizes, and grades, so they're not interchangeable.
• Baseball cards: Each card has unique qualities such as rarity that add or subtract from its value.
• Real estate: Each house experiences different levels of noise and traffic, is in varying states of repair, and has unique views of surrounding areas, even on a street of identical houses.

Special Considerations

The line between fungibility and non-fungibility may be a thin one. Gold is generally considered to be fungible because one gold ounce is equivalent to another gold ounce. But when otherwise fungible goods are given serial numbers or other uniquely identifying marks, they may no longer be quite as fungible. Adding unique numbers to bars of gold, collectibles, and other items makes it possible to distinguish them, which makes them non-fungible.

For example, 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 the gold bars deposited into the vault are weighed and inspected to confirm they match the depositor instructions. The exact bars deposited to the New York Fed are the exact ones returned upon withdrawal, so these types of gold deposits are not considered fungible.

The Bottom Line

Fungible assets are identical. One can be substituted for another without fuss or penalty. Stock shares listed on multiple exchanges are an example of fungible assets because they provide the same ownership interest regardless of who purchases them or where they're purchased. This strengthens the reliability of the asset in question and it can be an important consideration for the average investor.

Non-fungible assets, on the other hand, are unique in some way, which means one cannot be replaced with the other. Houses, gemstones, and artwork are all non-fungible goods.