In this photo illustration, a visual representation of digital cryptocurrencies, Bitcoin, Ripple, Ethereum, Dash, Monero and Litecoin is displayed.
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By Jeff John Roberts
Updated: May 1, 2018 12:49 PM ET

The digital currency markets, already spooked by a crackdown on digital tokens, got some more bad news this month: A former top regulator told an audience he thinks two of the most popular cryptocurrencies, Ethereum and Ripple’s XRP, are “noncompliant securities” operating outside U.S. laws.

This conclusion is potentially disastrous for the crypto economy as it would undermine the liquidity of the two popular cryptocurrencies, and place exchanges and other financial services businesses in legal jeopardy from the SEC. The good news for crypto investors is that the prospects of the SEC taking action are remote.

Should Ethereum be treated like Apple stock?

Until mid-2017, selling digital tokens to the public wasn’t much harder than selling lollipops. A team would describe the purpose of the tokens in a white paper, and then arrange a so-called “Initial Coin Offering” (ICO) where anyone could buy them in exchange for Bitcoin or cash.

In theory, the point of an ICO is to fund the construction of an online service (such as file storage or remote computing) on which the tokens could eventually be redeemed. Many ICO participants, however, regarded the tokens as a source of speculation—hoping to flip them to another buyer rather than using them for the underlying service. In some cases, the ICOs amounted to blatant scams where the organizers promptly absconded with the money.

Unsurprisingly, regulators took a dim view of all this. While the SEC was slow off the mark, the agency fired a warning shot last July by saying tokens sold in an ICO could be securities that needed to be registered in the same way as a share of Apple or GM. And in March, SEC head Jay Clayton put a deep chill on the once-hot token economy by saying every ICO he had seen amounted to a securities offering.

While the crackdown is bad news for those planning an ICO, few thought the regulators’ new hardline would affect existing tokens like Ethereum and Ripple’s XRP, which have been trading for years. Nonetheless, this could change if one former agency head holds sway. As Bloomberg reports:

Gary Gensler, the former chairman of the Commodity Futures Trading Commission, said that government officials should take a closer look at the largest coins by market capitalization, not just at tokens sold in ICOs. Ethereum’s Ether and Ripple’s XRP could probably be classified as securities, Gensler said.

Gensler added that other longtime cryptocurrencies like Bitcoin and Litecoin are likely exempt because they were not issued via an ICO.

Gensler’s remarks, made at an MIT gathering last week, imply that Ripple and the Ethereum Foundation—both of which sell reserve stocks of their respective cryptocurrency—could be violating securities law. Likewise, it implies that the popular U.S. exchange Coinbase won’t be able to add new Ripple or other new digital currencies, and that it could face trouble for selling Ethereum, which it has made available since 2016.

“Picking Winners and Losers”

The SEC swooping down on the likes of Ripple and Ethereum would convulse cryptocurrency markets. But the chances of that happening are remote, according to securities lawyers and former regulators.

“It’s highly unlikely they’ll go back and impose some onerous burdens. It would be very unusual for a regulator to go back in time and say ‘you should have thought three or four years ago when you started that this was a security’,” said Phil Lookadoo, a commodities lawyer with Haynes and Boone. “To single out one or two cryptocurrencies because of the way they were formed would be picking winners and losers. It’s not the sort of thing the SEC would want to be doing.”

Others shared this view, saying the SEC might make a case against the Ethereum Foundation and Ripple using a legal assessment known as the Howey Test, but that it would be a tough slog and the companies would dig in long for a court fight. The consensus view appears to be the agency would prefer to spend its resources and political capital elsewhere.

“To the extent the SEC even holds that view, I agree it wouldn’t go back in time and apply the Howey Test to something from 2015 or 2016. To the extent there were security elements on these platforms, they’ve dissipated over time,” said Blake Estes, a financial lawyer with Alston & Bird.

Meanwhile, the SEC may also be wary of chilling innovation when it comes to the emerging blockchain and cryptocurrency industries, according to Keith Higgins, a former SEC director who is now a securities attorney at Ropes & Gray. In Higgins’s view, the SEC should use its prosecutorial discretion in a way that doesn’t introduce a “regulatory cloud” over the industry.

Several of the attorneys who spoke to Fortune also pointed out that Gensler’s background is as at the Commodity Futures Trading Commission (CFTC), which does not have a role in determining what constitutes a security.

The upshot of all this is not the go-go ICO days of 2017 will return anytime soon. Instead, it means the SEC is likely to maintain the current status quo—allowing well-established digital tokens to trade freely, while restricting new ICOs for the time being.

Meanwhile, it remains unclear to what degree regulatory uncertainty is causing Coinbase to delay adding new tokens like XRP, which is an autonomous token but whose supply is for now primarily owned by Ripple. According to Estes, the delay is unlikely to be rooted in SEC concerns, but could instead be tied to the time and expense of complying with state level regulations.

This story was updated at 7:15pm to note XRP is an autonomous currency.

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