An ungrounded receptacle may be replaced by a ground fault circuit interrupter installed:

A ground fault circuit interrupter (GFCI) is designed to protect against electric shock by detecting ground faults and interrupting the circuit. When replacing an ungrounded receptacle with a GFCI, it is crucial to install the GFCI upstream from the ungrounded receptacle. This position allows the GFCI to monitor and protect the circuit by sensing any leakage currents that may occur.

Installing the GFCI upstream ensures that it can function correctly to interrupt the electrical current, thereby providing protection to any downstream devices connected to the circuit. If the GFCI were placed downstream, its ability to protect the receptacle itself would be negated, as it would not detect faults occurring at the receptacle. Therefore, to maintain safety and compliance with electrical codes, the correct approach is to install the GFCI upstream from the receptacle.