Fungibility

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What is 'Fungibility'

Fungibility is a good or asset's interchangeability with other individual goods or assets of the same type. Assets possessing this fungibility property simplify the exchange and trade processes, as interchangeability assumes everyone values all goods of that class the same. Many diverse types of assets are considered to be fungible.

BREAKING DOWN 'Fungibility'

Fungibility implies that two things are identical in specification, where individual units of the commodity or good 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. Cross-listed stocks are also considered fungible because it does not matter if you purchased a share of XYZ stock in its home country or in a foreign country; the stock should be accepted at either location as XYZ stock.

Fungibility Versus Non-Fungibility

Another example of fungibility is currency. 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 the currency is mutually substitutable. In the same sense, Person A can be repaid with two $20 bills and one $10 bill and still be satisfied as the summation of those bills equals $50. But, 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.

The line between fungibility and non-fungibility may be a thin one. Though gold is generally considered fungible, since one gold ounce is equivalent to another gold ounce, in certain cases, the precious metal is not considered fungible. 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 basement floor 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, the types of gold deposits are not considered fungible.

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