Security and Regulatory Compliance Flashcards

What is 'rug pull' fraud in the context of DeFi?

Answer: When developers abandon a project and abscond with investor funds after removing liquidity

A rug pull occurs when project developers suddenly withdraw all liquidity from a DeFi pool, leaving investors with worthless tokens and no recourse.

Which security feature does multisig (multi-signature) provide for a cryptocurrency wallet?

Answer: It requires multiple private key signatures before a transaction can be executed

Multisig wallets require M-of-N key holders to sign a transaction before it is broadcast, reducing single point of failure risk.

What was the significance of the SEC v. Ripple (XRP) ruling for crypto regulation?

Answer: It provided partial clarity by distinguishing institutional sales (securities) from programmatic exchange sales (not securities)

The 2023 ruling found XRP sales to institutional investors were securities but programmatic sales on exchanges were not, creating a contested but notable regulatory distinction.

What is 'social engineering' in the context of cryptocurrency theft?

Answer: Manipulating people psychologically to reveal private keys or send crypto to fraudsters

Social engineering exploits human psychology rather than technical vulnerabilities—attackers impersonate support staff, romantic partners, or investment advisors to steal crypto.

What is the primary purpose of on-chain analytics tools like Chainalysis in regulatory compliance?

Answer: To trace the flow of funds and identify illicit activity on public blockchains

Blockchain analytics firms cluster wallet addresses and trace fund flows to help exchanges, regulators, and law enforcement identify money laundering, sanctions violations, and fraud.

What does the term 'KYC' stand for and why is it required for crypto exchanges?

Answer: Know Your Customer — an identity verification requirement under AML regulations

KYC (Know Your Customer) requires exchanges to verify user identities to prevent money laundering, terrorist financing, and sanctions evasion under the Bank Secrecy Act.

What is a 'flash loan attack' in DeFi security?

Answer: Exploiting uncollateralized instant loans to manipulate prices and drain protocol funds in a single transaction

Flash loan attacks borrow large sums without collateral within a single transaction block to manipulate oracle prices or exploit protocol logic, repaying the loan in the same block.