Fungibility as a Legal Criterion: Implications for NFT Collections and Their Derivatives
Fungibility, once a straightforward property of money and commodities, becomes a shifting and relational concept in NFT markets — where “unique” tokens often behave like interchangeable units and derivatives further blur the line.
This article argues that fungibility in DLT environments is no longer an inherent attribute of assets but a contextual, socially constructed and technologically mediated criterion — one that EU regulators cannot safely treat as a simple binary when dealing with NFT collections and their layered derivatives.
Introduction
Fungibility is one of the oldest and most fundamental taxonomic principles of private and financial law. It distinguishes goods that are interchangeable from those whose individuality matters. This distinction governs transfer rules, property allocation, restitution, collateralisation and market operations. Yet in the digital environment shaped by distributed ledger technology (DLT), fungibility acquires a radically new significance. It no longer depends solely on intrinsic characteristics of assets, but also on social perception, market behaviour, metadata structures and protocol-level design. This evolution poses a major challenge for legal systems seeking to classify tokens, particularly non-fungible tokens (NFTs) and the complex set of derivative assets that emerge from them.
The legal status of NFTs is often presented as self-evident: they are non-fungible. But this assumption collapses under closer analysis. Many NFT collections exhibit a standardised structure that renders individual tokens largely interchangeable for transactional purposes. Meanwhile, derivative practices—fractionalisation, pooling, synthetic NFTs, replicated metadata, or tokenised claims linked to NFT collections—erode and destabilise the criterion of non-fungibility. As a result, the nominal non-fungibility of NFTs conceals an underlying spectrum of fungibility that varies across markets, protocols and use cases.
This article argues that fungibility should not be treated as a static technical property but as a dynamic legal criterion requiring contextual, functional and relational analysis. It examines how fungibility operates within NFT collections, how derivatives challenge the classical binary distinction between fungible and non-fungible assets, and how the law must adapt to these hybrid situations.
I. Fungibility Beyond the Technical Definition: A Relational and Contextual Concept
In traditional doctrine, fungibility is a property of goods that are quantitatively interchangeable, such as money, commodities or standardised securities. Non-fungible goods possess unique characteristics that render them individually significant. This binary distinction served the needs of analogue markets, where individuality or uniformity were relatively stable features.
In the DLT environment, however, fungibility becomes deeply relational. An NFT is technically non-fungible because it possesses a unique identifier on the blockchain. But this technical uniqueness does not guarantee legal or economic uniqueness. Within large NFT collections—such as generative art series or profile-picture communities—the functional differences between individual tokens may be minimal. Market participants often treat tokens within the same collection as economically fungible, valuing them primarily on the basis of floor prices, rarity categories or marketplace liquidity.
Fungibility thus becomes dependent not only on metadata but on the collective practices of users, traders, platforms and protocols. It emerges as a social construct built on expectations and behaviours rather than on inherent attributes encoded in the token. The law cannot ignore these practices; it must take them into account when classifying tokens and determining applicable regimes.
II. The Paradox of NFT Collections: Individual Non-Fungibility and Collective Fungibility
NFT collections present a conceptual paradox. Each token is technically unique, yet the collection as a whole functions like a class of semi-fungible assets. In many collections, uniqueness is reduced to a mere formality. The economic relevance of individual NFTs depends less on their technical identifier than on their belonging to a recognisable class, defined by visual patterns, rarity traits or community narratives.
This phenomenon reveals an important distinction between formal non-fungibility and substantive fungibility. Formal non-fungibility derives from the blockchain architecture. Substantive fungibility arises when market participants treat tokens as interchangeable within a certain range of attributes. A collection of 10,000 generative tokens may therefore operate as a de facto fungible series, even if technically each token is unique.
This distinction matters because legal regimes based on uniqueness—such as exemptions in MiCA for “unique, non-fungible” tokens—may be undermined if the tokens function in practice like fungible instruments. The legal system must therefore determine whether it should classify tokens based on their formal structure or on their economic behaviour. Relying solely on technical definitions risks overlooking the real risks and market dynamics associated with NFT collections.
III. Derivative Practices and the Erosion of Non-Fungibility
The emergence of derivative practices deepens the conceptual crisis surrounding fungibility. Fractionalisation transforms a non-fungible NFT into a set of fungible claims that can be traded, staked, collateralised or used within decentralised finance (DeFi) protocols. Pooling aggregates multiple NFTs into a collective vault whose shares are fungible. Synthetic NFTs replicate metadata or economic exposure without reproducing the underlying token itself. Even liquidity pool tokens associated with NFT marketplaces generate fungible representations of otherwise non-fungible assets.
These derivative mechanisms blur the boundary between fungible and non-fungible assets. They create layered structures in which the same underlying NFT can generate multiple forms of representation—some fungible, some non-fungible, some hybrid. They also reveal that non-fungibility is not a binary attribute but a spectrum influenced by financial engineering.
This erosion of non-fungibility undermines the regulatory assumption that NFTs, being unique, are inherently less likely to exhibit the market risks associated with fungible tokens. In reality, NFT derivatives can produce liquidity concentration, speculative bubbles, interconnected risk exposures and contagion mechanisms comparable to those found in fungible token markets.
IV. Legal Implications of Fungibility as a Criterion in NFT Regulation
The instability of fungibility has important consequences for legal classification, regulatory applicability and enforcement. First, the law must decide whether fungibility should be assessed at the level of the token itself or at the level of the economic ecosystem that surrounds it. If assessed at the token level, most NFTs will remain legally non-fungible, regardless of market dynamics. If assessed at the ecosystem level, many NFTs may qualify as quasi-fungible assets, requiring treatment similar to other transferable digital assets under MiCA.
Second, the law must determine how to classify derivative assets produced through fractionalisation, pooling or synthetisation. These derivatives may be more fungible than the underlying NFTs, potentially transforming them into financial instruments or into crypto-assets subject to MiCA’s full regime. The connection between underlying non-fungibility and derivative fungibility complicates the application of securities law, consumer protection norms and rules on market manipulation.
Third, fungibility affects the allocation of property rights. In a collection where tokens are treated as interchangeable, the traditional notion of individuated ownership becomes less significant. Legal disputes may arise regarding valuation, substitution and restitution, especially where derivative products obscure the identity of the underlying asset.
Fourth, fungibility has implications for enforcement and supervision. If the market treats certain NFT collections as de facto fungible, regulators may need to consider whether they fall within regimes designed to address liquidity risks, speculative dynamics and mass-market exposures.
Conclusion
Fungibility, once a stable and intuitively understood legal criterion, has become a complex and relational concept in the context of NFT collections and their derivatives. The binary distinction between fungible and non-fungible assets no longer maps onto the technological and economic realities of DLT-based markets. NFT collections exhibit a paradoxical mixture of formal non-fungibility and substantive fungibility, while derivative products further erode and destabilise the boundaries of the category.
For legal systems and regulators, this evolution poses a formidable challenge. Classifying tokens based solely on technical structures risks producing regulatory blind spots, while classifying them solely on market behaviour risks undermining legal predictability. A more nuanced, relational approach is required—one that acknowledges the hybrid, evolving and socially constructed nature of fungibility in digital environments.
As NFTs continue to integrate with financial markets, gaming ecosystems and decentralised governance structures, the law must rethink its reliance on fungibility as a categorical determinant. The crisis generated by hybrid and derivative NFT structures is not merely a matter of classification; it is a sign of a deeper transformation in the ontology of digital assets. Fungibility is no longer an inherent property—it is a dynamic legal phenomenon requiring reinterpretation in the age of programmable value.
Key takeaway. In NFT ecosystems, “non-fungible” is less a technical fact than a moving legal target: collections and their derivatives show that fungibility exists on a spectrum shaped by code, markets and social practice — and EU regulation will have to follow that spectrum rather than cling to a formal binary.