C4 Professional Ethics & Standards 2 — Questions and Answers
Question 1: A crypto professional discovers their employer is using client funds to cover operational losses without disclosure. What is the MOST ethically appropriate first action?
- Ignore it to protect job security
- Internally report the issue to compliance or legal counsel (Correct answer)
- Immediately post about it on social media
- Transfer client funds to a safer wallet
Correct answer: Internally report the issue to compliance or legal counsel
Reporting internally to compliance or legal counsel follows proper whistleblower and fiduciary duty protocols before escalating externally.
Question 2: Under C4 standards, what does the principle of 'non-malfeasance' require of a cryptocurrency professional?
- Maximizing client profits at all costs
- Avoiding actions that cause harm to clients or the market (Correct answer)
- Disclosing all proprietary trading strategies
- Reporting all transactions to the IRS
Correct answer: Avoiding actions that cause harm to clients or the market
Non-malfeasance requires professionals to avoid conduct that harms clients, third parties, or market integrity.
Question 3: A C4-certified professional is asked to endorse a DeFi project they have not personally vetted. What should they do?
- Endorse it if the fee is sufficient
- Decline or conduct thorough due diligence before endorsing (Correct answer)
- Endorse it anonymously to avoid liability
- Ask a colleague to endorse it instead
Correct answer: Decline or conduct thorough due diligence before endorsing
Professional standards prohibit endorsing products without adequate due diligence to protect the public from misleading recommendations.
Question 4: Which scenario BEST illustrates a conflict of interest for a crypto asset advisor?
- Advising a client to buy Bitcoin while personally holding no crypto
- Recommending a token in which the advisor holds a large undisclosed position (Correct answer)
- Charging a flat fee for portfolio management services
- Explaining the risks of leverage trading to a new client
Correct answer: Recommending a token in which the advisor holds a large undisclosed position
Recommending assets in which the advisor holds undisclosed positions is a textbook conflict of interest that must be disclosed.
Question 5: According to professional ethics standards, how should a crypto professional handle a request to facilitate a transaction they suspect involves money laundering?
- Process the transaction and document it privately
- Refuse and file a Suspicious Activity Report (SAR) if required by law (Correct answer)
- Ask the client for a written guarantee of legality
- Charge a higher fee to offset the legal risk
Correct answer: Refuse and file a Suspicious Activity Report (SAR) if required by law
AML obligations require refusing suspicious transactions and filing SARs with FinCEN as mandated by the Bank Secrecy Act.
Question 6: A blockchain analyst receives a subpoena for client transaction records. What is the ethically and legally correct response?
- Destroy the records to protect client privacy
- Consult legal counsel and comply with valid legal process (Correct answer)
- Notify the client before complying
- Provide only anonymized data regardless of the subpoena
Correct answer: Consult legal counsel and comply with valid legal process
Valid legal process (subpoenas) must be honored; consulting legal counsel ensures compliance while protecting all parties' rights.
Question 7: Which practice violates professional standards when a crypto advisor manages discretionary accounts?
- Diversifying across multiple asset classes
- Executing trades to generate commissions rather than client benefit (churning) (Correct answer)
- Maintaining detailed trade logs
- Rebalancing the portfolio quarterly per the investment policy statement
Correct answer: Executing trades to generate commissions rather than client benefit (churning)
Churning — trading excessively to generate commissions — is a fiduciary breach and violation of professional ethics standards.
C4 Professional Ethics & Standards 2
A crypto professional discovers their employer is using client funds to cover operational losses without disclosure.
What is the MOST ethically appropriate first action?