The state of North Carolina has effectively been warned by the Department of Justice: Back down from banning transgender people from certain bathrooms or unpleasant things will ensue. The letter that Republican Gov. Pat McCrory received from the federal agency on Wednesday demanded a response by close of business on Monday. If he doesn’t do what the Justice Department asks, the state could be slapped with a lawsuit and potentially denied millions in federal funds. And while it’s unlikely, this could also be the beginning of a historic precedent being set.

At issue is HB2, a law that state legislators called a special session to pass in March, which mandates that state residents must use the public bathrooms that match their “biological sex,” defined as the sex on their birth certificate. Lawmakers crafted the measure in response to the state’s largest city, Charlotte, passing local LGBT non-discrimination protections that, among other things, affirmed the right of transgender men and women to use the bathrooms that match their gender identity.

In the letter, the Justice Department alleges that this law violates federal civil rights protections because discriminating against transgender people is a form of sex discrimination. The bulk of the letter concentrates on the treatment of state employees. And the argument is this: If the state allows “non-transgender” employees to use the sex-segregated bathrooms that align with their gender identity but denies that right to transgender employees, then the latter are not receiving full and equal access to bathrooms—and that’s sex discrimination. The letter demands that the state cease implementation of the law.

A Justice Department official told TIME on Wednesday that it hopes North Carolina will comply with federal law, but that the department is prepared to use tools at its disposal to compel the state to comply if necessary.

The question of ‘sex discrimination’

The Department goes on to quote a 2015 ruling from the federal Equal Employment Opportunity Commission, which found that the Army discriminated against a transgender civilian employee in denying her access to the women’s room after she transitioned on the job. The EEOC said bathroom access is “a significant, basic condition of employment” under Title VII of the Civil Rights Act.

Several other rulings, including one in North Carolina’s own Fourth Circuit, have similarly found that denying transgender people such bathroom access is a form of sex discrimination. Under President Obama, the Department of Justice has repeatedly said that transgender people are protected by long-standing bans on sex discrimination, and the Department of Education has issued similar guidance. (Sexual orientation hasn’t found such robust protection under those bans, one of the few ways in which transgender Americans have made more legal progress than their lesbian, gay and bisexual peers.)

It isn’t that unusual for the Department of Justice to send out a warning shot like this, former government civil rights enforcers say. What is unusual is that there are no complicated questions about the facts in this case, no particular instances to be fleshed out. “According to the Department, the way this law is written, the only way it can be enforced is by discriminating,” says University of San Francisco law school dean John Trasviña, a former assistant secretary for fair housing and equal opportunity in the U.S. Department of Housing and Urban Development. “The vast majority [of such cases] always typically settle,” he adds. “But this is one where you can’t really compromise.”

So what happens next? The simplest outcome is that McCrory complies, finally caving to this last increase in pressure after already losing millionsin economic activity as hundreds of businesses and public figures have come out against the law. “If the governor comes back and says ‘No,’ this letter means the Department is prepared to file a lawsuit,” says William Yeomans, an American University law professor who spent 26 years working on civil rights cases at the Justice Department.

If that lawsuit were filed in North Carolina, the state should be prepared to lose on the first go-round, given the precedent that’s already been set by the Fourth Circuit. Should both sides dig their heels in and appeal to the Supreme Court—and should the court take the case up—it could set a precedent that all courts must interpret laws banning sex discrimination as also banning unequal treatment based on gender identity. And that could give transgender rights advocates protections they have sought for decades. On the other hand, the Supreme Court could rule against that interpretation of the law, particularly if presumptive Republican presidential nominee Donald Trump wins the 2016 election and has the chance to install a fifth conservative on what is currently a split, eight-member court.

The dollar bills

Right now, as one law professor puts it, “while this may not be the most welcoming letter, it is the beginning of a conversation,” one that could be over by Monday. But LGBT rights advocates are concentrating on a possible outcome much further down the line, pointing to this letter and saying that the state is at risk of losing millions, if not billions, in federal funding. Because civil rights violations can put federal funding at risk.

Toward the end of the letter, the Department of Justice notes that the feds have also interpreted this state law to violate the Violence Against Women Act and Title IX, which prohibits sex discrimination in education. By the ACLU’s calculation, that means that $4.5 billion in federal funds, particularly for things like schooling, could be denied to the state. Former agency officials, however, say that it is “extremely rare” for this “nuclear option” to be deployed. More often it is left unsaid or, occasionally, levied as a threat. “Nobody,” says University of Michigan law professor Samuel Bagenstos, “wants to inflict that kind of pain on the students.”

Even during desegregation, when many state officials were refusing to comply with federal rules, one can only find “the occasional withholding,” says Bagenstos, who previously served as the No. 2 official in the Justice Department’s Civil Rights Division. And the figures aren’t so clear cut either, he says. Each agency is in control of its own funds and some funds are indirect, like money that comes from the Department of Agriculture and pays for lunches in public schools. The Department of Justice cannot put Department of Education funds on the chopping block without the latter initiating the process, Bagenstos says.

University of San Francisco’s Trasviña believes that if the governor refuses to comply, “the outcome of this complaint letter will definitely go into the next administration.” It’s unlikely that a Democrat would roll back the Obama administration’s LGBT-inclusive interpretations of the law. And while Trump might win and install a conservative justice on the Supreme Court, the likelihood of him having his attorney general send an “actually, never mind about that” letter are smaller, former officials say. “If he wanted to change enforcement policy here, he would have the power to do it. It would be more problematic to interfere with an ongoing enforcement matter,” says American University’s Yeomans. “If things are already in the pipeline, it looks very political to pull the plug.”