Regulation and Compliance Flashcards
6 cards from real Cryptocurrency practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Regulation and Compliance flashcards as text
What is the primary requirement of the Financial Action Task Force (FATF) "Travel Rule" as it applies to Virtual Asset Service Providers (VASPs)?
Answer: VASPs must obtain, hold, and transmit required originator and beneficiary information for transactions above a certain threshold.
The FATF's Recommendation 16, known as the "Travel Rule," requires VASPs to pass certain information to the next financial institution in a transaction chain for virtual asset transfers over a specific threshold (e.g., $1,000 USD/EUR). This information includes the originator's name and account number, and the beneficiary's name and account number, to help prevent money laundering and terrorist financing.
A new crypto project launches an Initial Coin Offering (ICO). The marketing materials emphasize that buyers can expect significant profits based on the managerial and entrepreneurial efforts of the core development team. Under U.S. law, which legal test is the SEC most likely to use to determine if this token is a security?
Answer: The Howey Test
The Howey Test, established by a 1946 Supreme Court case, is the primary legal framework used by the SEC to determine if a transaction qualifies as an "investment contract" and is therefore a security. It has four prongs: 1) an investment of money, 2) in a common enterprise, 3) with a reasonable expectation of profits, 4) to be derived from the efforts of others. This scenario directly aligns with these criteria.
Which of the following is a primary obligation for a U.S.-based cryptocurrency exchange under the Bank Secrecy Act (BSA)?
Answer: Filing Suspicious Activity Reports (SARs) with the Financial Crimes Enforcement Network (FinCEN).
Under the Bank Secrecy Act, cryptocurrency exchanges are regulated as Money Services Businesses (MSBs). A key requirement for MSBs is to establish an anti-money laundering (AML) program, which includes monitoring for and reporting suspicious transactions to FinCEN by filing a SAR. This helps authorities detect and prevent financial crimes.
An investor buys 1 ETH for $2,000. Eight months later, they use that 1 ETH to purchase a single NFT at a time when the value of ETH is $3,100. According to IRS guidance in the United States, what is the immediate tax consequence of this transaction?
Answer: A capital gain of $1,100 must be reported.
The IRS treats cryptocurrencies as property for tax purposes. Using one property (ETH) to acquire another (an NFT) is a disposition of the ETH and is a taxable event. The investor realizes a capital gain calculated as the fair market value at the time of the trade ($3,100) minus their cost basis in the ETH ($2,000), resulting in a $1,100 gain.
When the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) adds a specific cryptocurrency address to its Specially Designated Nationals (SDN) list, what is the direct implication for U.S. persons and entities?
Answer: They are generally prohibited from engaging in any transactions with the sanctioned address.
OFAC maintains the SDN list as part of its enforcement of economic and trade sanctions. Once an individual, entity, or cryptocurrency address is placed on this list, U.S. persons (including citizens, residents, and companies) are strictly prohibited from dealing with them. Any assets of the sanctioned party under U.S. jurisdiction must be blocked and reported to OFAC.
Regulators and financial stability boards have expressed significant concerns about the systemic risk of stablecoins. Which of the following is a primary risk associated specifically with fiat-collateralized stablecoins?
Answer: A potential 'bank run' scenario where users lose confidence in the quality or existence of the reserves, leading to mass redemptions.
For fiat-collateralized stablecoins, the core promise is that each token is backed by an equivalent amount of real-world assets, like cash or government bonds. A primary systemic risk is the loss of confidence in the issuer's reserves. If users doubt that the reserves are sufficient or liquid enough, they may rush to redeem their stablecoins, creating a 'run' that could cause the stablecoin to lose its peg and potentially destabilize connected financial markets.