Fungibility is often held as a crucial characteristic of sound money. But what happens when money has a public record of every transaction, and morally questionable trades can be identified? Is bitcoin headed for a break in fungibility?
The debate about whether Bitcoin is fit to be a currency rather than a payment layer between currencies is as alive as it has ever been. Many of these tensions about what Bitcoin is or should be have been aired and discussed during the blocksize debate and are ongoing.
One essential element of a money which has not particularly been illustrated is how bitcoin might be affected by a significant gap in its “fungibility.”
“[Fungibility] is the idea that a 10 dollar note is the same as any other 10 dollar note. So if you receive a note that was involved in a theft 10 transactions go and the police investigated the theft, then they would have no right to take the note away from you,” according to Adam Back, the inventor of Hashcash.
According to Back, this is an old legal concept, often traced to a 17th century court case