Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution. That is, it is the property of essences or goods which are “ capable of being substituted in place of one another”.
Assets possessing this fungibility property simplify the exchange and trade processes, as interchangeability assumes everyone values all goods of that class the same.
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:
Consider two persons Ramu and Somu. Suppose if Ramu lends 100 rupees note to somu, it does not matter to Ramu if he is repaid with a different 100 rupee note. Ramu can be paid back with two 50 rupee notes. Since its summation is equal to 50. Hence, currency can be considered as fungible.
Let’s see an example of non-Fungibility. Suppose Ramu lends Somu his Car. It is not acceptable for Somu 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.