The Non-Fungible Characteristics of Digital Equities

By Lori Jo Underhill

The definition of fungible by Merriam-Webster is: "being something (such as money or a commodity) of such a nature that one part or quantity may be replaced by another equal part or quantity in paying a debt or settling an account. Oil, wheat, and lumber are fungible commodities, fungible goods, and capable of mutual substitution."

According to the SEC in a statement of rules about derivatives, "Fungible instruments (that) are standardized as to their material economic terms."

There is a line of United States case law where courts have ruled that stock equities are fungible based on their characteristics and material economic terms. These definitions were determined in a time when settlements by DTC (Depository Trust Corporation) held custodial equities in bulk, and stock equity trades are executed in a single market during specific trading hours where equities of similar character have the same material economic value.

However, not all Digital Equities share the same characteristics and economic value.

Digital Equity

Definition: A “Digital Equity” is a representation of an ownership interest; whole or fractional, tangible or intangible. A market may or may not exist in consensus for the value of the underlying property. A Digital Equity is difficult or impossible to divide. A Digital Equity is non-fungible. A non-fungible asset is unique in its characteristic as a representation of an asset or item, or the manifestation of one unique and serialized intangible or tangible asset or item. Digital Equities are unique to one another, distinct in character, and not interchangeable.

Examples, Unique Shares of an Entity, Ownership in Real Property, Cryptokitties, Bonds, Shares in Financial Products, Unique Artwork, Jewelry, or Couture Fashion. Any asset that is indivisible, serialized, or unique.

DIGITAL EQUITIES ARE DISTINCT FROM INCUMBENT STOCK EQUITY INSTRUMENTS

There are three reasons why Digital Equities are distinct from Incumbent Equities.

1. The Digital Equity may not be held in custody by a third party and held by the owner.

2. Serialization, Identity, and Authentication rights are an integral, inherent, and fundamental part of the asset.

3. Digital Assets are generally traded and exchanged in more than one market, not necessarily held in custody by a third party, and the characteristics and material economic terms of the asset are not necessarily equal to another Digital Asset of the same name or symbol at the same moment in time. These characteristics of identity and economic value are usually distinct and unique.

A Digital Equity - Security, has unique ownership, identity, and authentication characteristics creating it inherently distinct from any other Digital Asset. These unique qualities add a fundamental attribute characteristically inherent to the Digital Asset. This, coupled with the fact that Digital Equities are not traded in just one market, creates an unequal material economic value, further supporting a non-fungible legal determination.

A blockchain or distributed ledger records a transaction for a particular asset. That asset's ownership is determinable through the line of transactions that are immutable, traceable, and identifiable.

Securities law in many jurisdictions strictly require reporting and accountability, place limitations on legal accredited ownership, enforce custodianship rules, and require transparent exchange traceability for purposes of KYC and AML regulations. These requirements render the asset non-fungible by the very nature of its lack of agnostic, non-unique, and non-fluid exchangeability. Digital Equities are distinct from tangible currencies and other tangible assets that can be exchanged and transported entirely outside of electronically traceable conduits, and do not fall under strict reporting and accountability requirements.

There are three further definitions that should be considered to properly sub-classify Digital Equities. The assets classified as Digital Equities can be either a "Manifested Asset", "Representative Asset", or an "Underlying Asset". Digital Asset sub-classes will further categorize these assets as Digital Equity - Entity Security, Digital Equity - Real Estate, Digital Equity - Bond, Digital Equity - Real Property, Digital Equity - Digital Property, etc.

"Manifested Asset": A Digital Equity that is a digital non-fungible unique manifestation of a store of value without an underlying asset. These are unique, serialized, and non-fungible assets.

"Representative Asset": A Digital Asset that is the representation of an underlying fungible or non-fungible asset (tangible, intangible, or digital). Non-fungible as a Digital Equity, and fungible as a Certificate of Value.

"Underlying Asset": An asset (tangible, intangible, or digital) represented by another Digital Asset.

It is conceivable that it will be determined that a non-fungible Representative Asset can "wrap" a fungible Underlying Asset such as a share of fungible common stock. Law is firmly rooted in definition and classification, and this construct supports existing regulatory and financial infrastructures.

The four Digital Asset classes Digital Commodity, Digital Currency, Digital Certificate of Value, and Digital Equity defined by the

DASH – Digital Asset Sector Hierarchy™

fundamental construct

firmly supports the world's existing regulatory and financial infrastructures.

Lori Jo Underhill B.S., J.D. is a Digital Economy Analyst, “Digital Economist”, Bachelor of Science in Business Administration from Arizona State University in Tempe, Arizona, USA, and Juris Doctor from Southwestern Law School in Los Angeles, California, USA. She currently works as an Executive Consultant with over 30 years’ experience in hardware and software technology and media. https://www.ljuassociates.com https://www.linkedin.com/in/lori-jo-underhill/