Fungibility

Reviewed by Sujaini | Updated on Aug 27, 2020

What Is Fungibility?

Fungibility is the right to exchange a product or asset with other individual products or assets of the same kind. Fungible assets simplify the processes of exchange and trade, as fungibility implies equal value among assets.

Understanding Fungibility

Fungibility means that two objects are equivalent in design and their individual units can be mutually replaced. Different grades of crops, such as No. 2 yellow corn, are fungible, for example, because it doesn't matter where the corn was grown; all corn classified as No. 2 yellow corn is equal in value.

Often called fungible are cross-listed stocks which are similar common securities listed on the home country exchange and several global exchanges. The shares, whether you bought them on the New York Stock Exchange or the Tokyo Stock Exchange, represent the same ownership interest in a company.

Even though fungibility is commonly associated with finance, it is also found in other disciplines, such as quantum physics.

Fungibility vs Non-Fungibility

Money is another example of a fungible commodity. When Person A loans a Rs 50 note to Person B, then it doesn't matter to Person A if he is repaid with another Rs 50 note, as it is equally replaceable. In the same way, with two Rs 20 notes and one Rs 10 note, Person A can be repaid and still happy, as the sum equals Rs 50.

On the other hand, as an example of non-fungibility, if Person A loans his car to Person B, it's not appropriate for Person B to return another vehicle, even if it's the same model and make as the original car lent by person A. Cars are not fungible in terms of ownership, but the fuel that drive the cars are fungible.

Gold is considered fungible (one gold ounce is equal to another gold ounce), though in some cases, it is not.