Adam Tracy Discusses the Utility of Fungible and Non-Fungible Tokens

Transcribed from:

There’s a lot of talk about non-fungible versus fungible tokens and how … What I see is non-fungible tokens being used to disguise security tokens or misconstrue people on what the nature of their token is. Fungible tokens is a token that could be exchanged for each other, so think of a $20 bill. I have a $20 bill, you give me a $20 bill, we’re even. Bitcoin is a fungible token, right?

A non-fungible token is a token that isn’t equal, cannot be exchanged for each other because it represents different things. And there’s a lot of good use for non-fungible tokens, especially when it comes to certain certificated information, right? And this is hardwired into the smart contract, and that’s the nature of the non-fungible token. You think about KYC information, right? Having your information stored with that ERC 721 token, right? And being able to use that token to pass KYC, copyright information, even degrees, right? You think of educational degrees, things of that nature.

There’s a lot of great uses. But there’s also a lot of misconceptions. You think of a non-fungible commodity, right? Think of a diamond, for instance, right? Not all diamonds are the same. In fact, none of them are the same. You could have a non-fungible token represent a specific diamond, but you couldn’t trade those two tokens because the underlying commodity is, of course, different.

But where I’ve seen non-fungible tokens come up a lot is when it comes to quasi partnership, right? There’s a lot involving land for some reason, which I think is a great idea. I think a deed and title to land in the context of a non-fungible token is actually a great idea. But you see instances where people are selling fractional interest in something, and because it’s a fractional interest and not the same they’re using non-fungible tokens, which is the right thing to do, but of course, it’s confusing in the sense that you are effectively selling a security, because you’re selling a partnership interest, right? Not all the interests are the same, but that doesn’t mean you’re not selling a security.

And on the flip side of that, you could have commodity issues, right? Where your non-fungible token represents an underlying commodity and a right to receive that commodity, even though that commodity may be different. If that commodity is deliverable, you would have potentially liability under the Commodities Act for selling a futures contract or something similar. It’s definitely a unique and very utilitarian thing in terms of non-fungible tokens. I think there’s absolute great use for it, but I see people misconstruing the non-fungibility to disguise what would otherwise be partnership interests, commodities, fractional interests, fractional ownership.

And a security can represent anything, right? I’ve done hedge funds that were based on cargo containers, which by definition, aren’t actually even the same. It’s not the fact that it’s non-fungible that would make it upon which you’d lie the determination on whether it is a security token or not a security token. It’s whether or not the underlying asset itself would represent a security, so something to consider. It’s a great concept, but often misunderstood, so if you have any questions, hit me up: Adam at Adam Tracy, T-R-A-C-Y, dot IO, and I will talk to you later.