Fungibility

In economics and law, fungibility is the property of a good or a commodity whose individual units are essentially interchangeable.^[1]^[2] In legal terms, this affects how legal rights (such as ownership and the right to receive goods under a contract) apply to such items. Fungible things can be substituted for each other; for example, a $100 bill (note) is considered entirely equivalent to twenty $5 bills (notes), and therefore a person who borrows $100 in the form of a $100 bill can repay the money with twenty $5 bills. There is no requirement to return the same $100 bill. Non-fungible items are not substitutable in the same manner.

Goods that are fungible are treated as commodities, and markets in commodities are active and liquid because of their fungibility. For example, gold is generally fungible because its value does not depend on any specific form, whether of coins, ingots, or other states. However, a unique item such as a gold statuette would not be considered fungible with the same weight of gold in some other form. Other fungible commodities include other precious metals and grades of crude oil. The legal recognition of fungibility is limited, and even very similar items, such as new cars of the same model and specifications, are not considered fungible with each other in law.

Many financial instruments, such as shares, bonds and currencies, are also fungible.

Fungibility refers only to the equivalence and indistinguishability of each unit of a commodity or other thing with other units of the same thing, and not to the ability to easily trade it for something else.

Etymology

The word fungibility comes from the Latin fungibilis, from the verb fungī, meaning "to perform", via phrases such as fungi vice, meaning "serve in place of". It is related to words such as "function" and "defunct".^[3]

Use

Finance

Fungibility is different from liquidity. A good is said to be liquid if it can be easily exchanged for money or another good. A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time, place, etc.

Notably, money is fungible: one US $10 banknote is interchangeable with any other genuine banknote like it.^[4] It is also interchangeable with two fives, ten ones, or any other combination of banknotes and coins adding up to $10.

On the other hand, diamonds and other gems are not perfectly fungible because their varying cuts, colors, grades, and sizes make it difficult to find several diamonds expected to have the same value. Packaged products on a retail shelf may be considered fungible if they are of the same type and equivalent in function and form. Customers and clerks can interchange packages freely until purchase, and sometimes afterward. After one opens the package and uses the product, however, it is usually considered unique and no longer interchangeable with unopened packages outside of exceptional circumstances, such as a return or exchange.

The traditional definition of a security, which includes shares, bonds and similar, is a "fungible, negotiable instrument", where "instrument" refers to its status as a legal document and "negotiable" means that the owner can transfer it with good title, even though it itself may have had defective title.

Cryptocurrency

Cryptocurrencies are usually considered to be fungible assets, where one coin is equivalent to another. However, after a major breach in Japanese exchange Coincheck, token developers for cryptocurrency NEM added a special flag to hacked coins to indicate they are not to be traded or used.^[5]

Non-fungible tokens (NFTs) are similar to units of blockchain currency, except that they are connected to unique digital files, so that individual tokens can be considered to have a meaningful distinction from others. This distinguishability allows NFTs to have unique use cases, such as their use as blockchain gaming assets, digital collectibles, to indicating ownership of fine art or real assets, used to facilitate decentralized finance loans, and to earn reward tokens.^[6]^[7]

Tasking

Fungibility has been used to describe certain types of tasks that can be broken down into interchangeable pieces that are easily parallelized and are not interdependent on the other pieces. For example: If a worker can hand dig one meter of a ditch in a day, and a ten-meter ditch needs to be dug, that worker can either be given ten days to complete the entire project or nine more workers can be hired for a single day. Each worker can complete their piece of the project without interfering with the other workers, and more importantly, each worker is not dependent on the results of any of the other workers to complete their share of the total project.

On the other hand, non-fungible tasks tend to be highly serial in nature and require the completion of earlier steps before later steps can even be started. As an example of a serial task that is not fungible, suppose there was a group of nine newly pregnant women. After one month, these women would have experienced a total of nine months of pregnancy, but a complete baby would not have been formed.

Quantum physics

Oxford University theoretical physicist David Deutsch has adopted the term "fungible" to describe the physical nature of quantum particles and universes within the quantum multiverse, where, by virtue of being identical in all respects, different particles chaotically divide or combine as a result of physical interactions from a common fungible fund in superposition.^[8]

Law

United States

In legal disputes in the United States, when one party is compelled to remedy another party as the result of a ruling or adjudication, the appropriate legal remedy may depend on the fungibility of the underlying right, obligation or property interest that is intended to be restored.^[9] Depending on whether the interests of the aggrieved party are fungible, a determination made by the trier of fact, the appropriate remedy may change. For example, a court may require specific performance (an equitable remedy) as a remedy for breach of contract, instead of the more favored remedy of monetary damages.^[10]

Belgium

Belgium has adopted fungibility for its domestic central securities depository, CIK (Euroclear), which was set up in 1967–1968. According to royal decree No. 62, issued on 10 November 1967, depositors of fungible securities have the rights of co-ownership. This change was fundamental to the development of Euroclear, by then beginning to process Eurobonds and build systems.^[11]

References

^ Merriam-Webster. "Fungible (adjective)". Merriam-Webster Online Dictionary and Thesaurus. Merriam-Webster, Incorporated. Retrieved 22 August 2014.
^ "What is fungible? Definition and examples". Market Business News. Retrieved 2 April 2021.
^ Etymonline.com. "fungible (adj.)". Online Etymology Dictionary. Retrieved 12 August 2017.
^ Milton, Adam (15 February 2017). "Fungible, Trading Term Definition". The Balance. Retrieved 15 November 2015.
^ Alpeyev, Pavel (2018-01-29). "How to Launder $500 Million in Digital Currency". Bloomberg.
^ "Britannica Money". www.britannica.com. Retrieved 2024-02-12.
^ "10 Popular NFT Use Cases | Built In". builtin.com. Retrieved 2024-02-12.
^ "The flawed multiverse – Physics World". Physics World. 2011-09-22. Retrieved 2018-09-27.
^ S. Williston, The Law of Contracts § 1338 (1920); Farnsworth, E. Allan (1970). "Legal Remedies for Breach of Contract". Columbia Law Review. 70 (7): 1145–1216. doi:10.2307/1121184. JSTOR 1121184.
^ Bunge Corp. v. Recker, U.S. Ct. of App., 8th Cir., 1975; Restatement (Second) of Contracts Ch 16. introductory note (1981)
^ Norman, Peter (February 2008), Plumbers and Visionaries, Chichester: John Wiley & Sons, p. 12, ISBN 978-0-470-72425-5