The distinction of whether a digital asset is a utility or security token is crucial as many ICOs have found out to their cost. If the U.S. Securities and Exchange Commission (SEC) consider the digital asset to be a security token, it will be in the same classification as traditional stocks and shares in a trading company. The SEC was formed in 1934 with one of its main aims being to protect U.S. citizens from being scammed by unscrupulous businesses.
Almost all blockchain-related projects classify the digital assets they offer as utility tokens. This means the tokens are required for participants to use the service being created with blockchain technology. Ripple is a private company that was formed to make currency transfers cheaper than traditional high street banks, and they use a Ripple (XRP) utility token to facilitate the transfers.
There are no voting rights attached to the Ripple token so classification as a utility token would seem appropriate, but under the Howey Test, the SEC could consider it to be a security. The penalties for listing an unregistered security on an exchange can run to hundreds of millions of dollars and presumably the reason that Gemini and Coinbase chose not to list Ripple.
Blockchain projects, even centralized ones like Ripple, wish to have their tokens listed on as many exchanges as possible as it builds up the community and normally pushes up the value of the token. Some tokens have increased by as much as 100x when they become available on an exchange. Bloomberg has reported that Ripple offered to pay Coinbase and Gemini to add them to their exchanges, but their offers were rejected.
The offer made to Gemini is believed to be $1 million with an additional incentive of a loan of $100 million of XRP tokens. There are costs associated with listing a digital asset on an exchange, and there are no laws from preventing the exchange being compensated by Ripple or any other blockchain business. It appears that Gemini and Coinbase were more worried about the penalties that the SEC might impose than the compensation offered by Ripple and the trading commission they would have earned had they listed it.
Financial analyst, smartphone app designer, technical writer, and crypto enthusiast. Blockchain verified graduate of MOOC 9, DFIN-511: Introduction to Digital Currencies, run by the University of Nicosia.