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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. Assets that are fungible are exchangeable for each other and simplify the exchange and trade processes, as fungibility implies equal value between the assets.

BREAKING DOWN '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. Cross-listed stocks, which are identical shares of stock listed on multiple global exchanges in addition to the home country, are also technically 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.

Fungibility vs. 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 since the summation of those bills 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.

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, these types of gold deposits are not considered fungible.

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