As defined by the oxford dictionary: “Fungible (…) replaceable by another identical item; mutually interchangeable”. In the context of money fungibility means that all unit of a currency such as dollar or bitcoin is interchangeable for exactly one of any other unit. Bottom line is that if fungibility breaks down the money itself is unusable and therefore regulators has to process with caution not to break fungibility when regulating cryptocurrencies. If fungibility is destroyed the basic premise for using the money system is destroyed.
Considering the 1749 case concerning a certain Mr. Crawfurds and The Royal Bank in England. Before sending two £20 notes by mail to the bank Crawfurd recorded the numbers of the notes and signed the back of each. Later when the notes went missing Crawfurd used this to his advantage. He advertised in newspapers that the serial numbers of the two stolen notes and the fact that he had signed them. Eventually one of the notes were identified at a competing bank long after the robber had presumably spent it and the bank refused to return the stolen notes to Crawfurd (Reid 2013).
Considering the 1749 in England case concerning a certain “Mr. Crawfurds” and the “Royal Bank”, an individual and a banking institution. Before sending two £20 notes by mail to the bank Mr. Crawfurd recorded the numbers of the bank notes and signed the back of each. Later when the bank notes went missing Crawfurd used this to his advantage. He advertised in newspapers that the serial numbers of the two stolen notes and the fact that he had signed them. Eventually one of the bank notes were identified at a competing bank long after the robber had presumably spent it and the bank refused to return the stolen notes to Crawfurd (Reid 2013).
For example individuals conducting private cash transactions does not have to report all their transactions and thus there has always been a private transactional option since money was invented. Is the goal of regulators today a totalitarian state where all financial activity is monitored by the state? Total financial surveillance has never been experienced in the history of mankind. The worst-case scenario here is that regulators starts marking certain units of cryptocurrency illegal because they have been for example stolen. If one unit of cryptocurrency is worth more or less than any equivalent fungibility where one unit of currency is always worth the same as another is destroyed.
When regulators choose to obtain all information about cryptocurrencies and transactions entrepreneurs are wary. Having cryptocurrencies accepted as a form of money without destroying its fungibility trough making certain units illegal is favourable for entrepreneurs exploring the blockchain space and societies seeking to leverage blockchain’s capabilities. Entrepreneurs has to take a financial risk when choosing to work on a startup. If there is regulatory opposition and/or uncertainty in addition to the financial risk the entrepreneur acts risk-adversely and tries to avoid it through regulation shopping and can incorporate in a new legislation.
References
Reid K., (2013) Banknotes and Their Vindication in Eighteenth-Century Scotland. David Fox and Wolfgang Ernst (eds), Money in the Western Legal Tradition (Oxford University Press, 2014, Forthcoming); Edinburgh School of Law Research Paper №2013/19. Available at SSRN: https://ssrn.com/abstract=2260952 or http://dx.doi.org/10.2139/ssrn.2260952
