Cryptocurrency Security and Regulatory Compliance Questions and Answers

Question 1

A Virtual Asset Service Provider (VASP) is facilitating a transfer of €1,500 in cryptocurrency between two of its customers.
According to the Financial Action Task Force (FATF) 'Travel Rule' recommendations, what is the VASP's primary obligation regarding this transaction?

Accepted Answer

Obtain, hold, and transmit required originator and beneficiary information to the counterpart VASP.

Answer

Report the transaction to their local Financial Intelligence Unit (FIU) as it is above the €1,000 threshold.

Answer

Freeze the assets for 24 hours to screen the parties against international sanctions lists.

Answer

Only record the wallet addresses and transaction hash on the blockchain for transparency.

Question 2

A DeFi protocol's smart contract has a function that allows users to withdraw their deposited funds. An attacker discovers that the function sends the cryptocurrency *before* updating the user's balance in the contract's state. Which specific vulnerability can the attacker exploit to drain funds from the contract?

Accepted Answer

Reentrancy

Answer

Integer Overflow

Answer

Timestamp Dependence

Answer

Front-running

Question 3

Which of the following is a primary objective of implementing a Know Your Customer (KYC) program for a cryptocurrency exchange?

Accepted Answer

To comply with Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) regulations.

Answer

To ensure the exchange's trading engine can handle high volume.

Answer

To assess the creditworthiness of its customers for margin trading.

Answer

To provide users with personalized marketing and coin recommendations.

Question 4

A US-based cryptocurrency exchange identifies a wallet address on its platform that has been added to the Office of Foreign Assets Control (OFAC) Specially Designated Nationals (SDN) list. What is the exchange's immediate required action regarding the assets associated with this wallet?

Accepted Answer

Immediately block the assets and report the action to OFAC.

Answer

Notify the user that they have 10 days to withdraw their assets before the account is closed.

Answer

Convert the assets to a stablecoin and hold them in a separate omnibus account.

Answer

Reject any new incoming transactions but allow the user to withdraw the existing balance.

Question 5

A DeFi project team is preparing to launch a new lending protocol. To build trust with potential users and investors, they engage a third-party firm to conduct a thorough review of their smart contract code to identify potential vulnerabilities, logic errors, and security flaws. What is this process called?

Accepted Answer

A security audit

Answer

A penetration test

Answer

A bug bounty program

Answer

A regulatory compliance review

Question 6

Services that obscure the transaction trail of cryptocurrencies by pooling and mixing funds from multiple users are often scrutinized by regulators. What are these services commonly called?

Accepted Answer

Crypto Mixers or Tumblers

Answer

Decentralized Exchanges (DEXs)

Answer

Layer-2 Scaling Solutions

Answer

Oracles