CBP Legal, Compliance, and Economic Implications of Bitcoin 2 — Questions and Answers
Question 1: Under the Bank Secrecy Act (BSA), which type of business dealing in Bitcoin is typically classified as a Money Services Business (MSB)?
- A licensed stockbroker trading BTC futures
- A Bitcoin exchange that accepts fiat currency (Correct answer)
- A hardware wallet manufacturer
- A Bitcoin mining pool operator
Correct answer: A Bitcoin exchange that accepts fiat currency
Bitcoin exchanges that convert fiat currency to cryptocurrency are classified as MSBs under the BSA and must register with FinCEN.
Question 2: Which U.S. agency requires cryptocurrency exchanges to file Suspicious Activity Reports (SARs)?
- Securities and Exchange Commission (SEC)
- Commodity Futures Trading Commission (CFTC)
- Financial Crimes Enforcement Network (FinCEN) (Correct answer)
- Office of the Comptroller of the Currency (OCC)
Correct answer: Financial Crimes Enforcement Network (FinCEN)
FinCEN requires MSBs, including crypto exchanges, to file SARs for transactions that appear suspicious or involve potential money laundering.
Question 3: What does the 'Travel Rule' require of cryptocurrency exchanges in the U.S. when transmitting funds?
- Exchanges must report all cross-border transactions to Customs
- Exchanges must pass sender and receiver identifying information to counterparty institutions (Correct answer)
- Exchanges must delay international transfers by 24 hours
- Exchanges must use only domestic nodes for routing
Correct answer: Exchanges must pass sender and receiver identifying information to counterparty institutions
The Travel Rule requires that transmitting financial institutions pass along certain customer identifying information to the receiving institution when funds are transmitted.
Question 4: In the context of U.S. tax law, how does the IRS classify Bitcoin?
- Foreign currency subject to currency gain/loss rules
- Property subject to capital gains tax (Correct answer)
- A commodity exempt from income tax
- Legal tender treated like U.S. dollars
Correct answer: Property subject to capital gains tax
The IRS classifies Bitcoin as property, meaning capital gains rules apply when it is sold, exchanged, or used to purchase goods.
Question 5: Which economic concept best explains why Bitcoin has value despite not being backed by a physical commodity?
- Gresham's Law — bad money drives out good money
- Network effects — value increases as more users adopt it (Correct answer)
- Quantity theory — value is fixed by its supply ceiling
- Liquidity preference — people prefer holding it as cash
Correct answer: Network effects — value increases as more users adopt it
Bitcoin's value is partly explained by network effects: the more people and businesses accept it, the more useful and valuable it becomes.
Question 6: What is the primary purpose of Know Your Customer (KYC) requirements for Bitcoin businesses?
- To improve customer service and personalization
- To comply with consumer protection regulations
- To prevent money laundering and terrorist financing (Correct answer)
- To collect data for targeted advertising
Correct answer: To prevent money laundering and terrorist financing
KYC requirements are designed to prevent illicit financial activity by ensuring businesses can verify the identities of their customers.
Question 7: A U.S. citizen who uses Bitcoin to buy goods and the Bitcoin has appreciated since purchase must report what?
- Nothing, as spending is not a taxable event
- A capital gain equal to the appreciation at the time of the purchase (Correct answer)
- Ordinary income equal to the fair market value of goods received
- A currency exchange loss if the USD value fell
Correct answer: A capital gain equal to the appreciation at the time of the purchase
Spending appreciated Bitcoin is a taxable disposal, and the holder must report a capital gain equal to the increase in value from acquisition to spending.
CBP Legal, Compliance, and Economic Implications of Bitcoin 2
Under the Bank Secrecy Act (BSA), which type of business dealing in Bitcoin is typically classified as a Money Services Business (MSB)?