Cryptocurrency Regulation and Compliance 5 — Questions and Answers
Question 1: A US crypto exchange discovers a customer is on OFAC's Specially Designated Nationals (SDN) list. What must it do?
- Notify the customer and give them 30 days to withdraw funds
- Block the transaction and report to OFAC within 10 days (Correct answer)
- Transfer the account to a foreign exchange partner
- File a SAR with FinCEN and continue normal operations
Correct answer: Block the transaction and report to OFAC within 10 days
When a match with an SDN is found, exchanges must block the transaction and any associated funds, then file a blocked property report with OFAC.
Question 2: Under the Infrastructure Investment and Jobs Act (2021), which new crypto reporting requirement was introduced?
- All crypto transactions over $600 must be reported to the IRS
- Crypto brokers must report customer transactions to the IRS on Form 1099 (Correct answer)
- Crypto miners must obtain a federal license
- DeFi protocols must register with the SEC
Correct answer: Crypto brokers must report customer transactions to the IRS on Form 1099
The 2021 Infrastructure Act expanded the definition of 'broker' to include crypto platforms, requiring them to report user transactions to the IRS.
Question 3: What is the primary purpose of a crypto exchange's AML compliance program?
- To maximize transaction fees from high-volume traders
- To detect, prevent, and report money laundering and terrorist financing (Correct answer)
- To ensure tax compliance for all users
- To maintain a competitive advantage over unregistered platforms
Correct answer: To detect, prevent, and report money laundering and terrorist financing
AML programs are legally required to identify and prevent the use of crypto platforms for laundering illicit funds or financing terrorism.
Question 4: What was the outcome of the FTX collapse regarding crypto regulation in the US?
- Congress immediately passed a comprehensive crypto regulatory framework
- It intensified calls for stronger regulation and led to increased enforcement actions (Correct answer)
- The SEC declared all crypto exchanges exempt from securities laws
- FinCEN reduced AML requirements to attract crypto businesses back to the US
Correct answer: It intensified calls for stronger regulation and led to increased enforcement actions
FTX's $8 billion fraud accelerated congressional and regulatory focus on crypto oversight, leading to more enforcement actions and regulatory proposals.
Question 5: Which of the following activities would MOST likely cause a crypto exchange to file a Suspicious Activity Report (SAR)?
- A customer making a single $500 purchase of Bitcoin
- A customer repeatedly transacting just below $10,000 with no clear business purpose (Correct answer)
- A customer requesting to convert crypto to multiple different fiat currencies
- A customer updating their KYC information after moving to a new address
Correct answer: A customer repeatedly transacting just below $10,000 with no clear business purpose
Repeated transactions just below reporting thresholds (structuring) is a classic red flag that triggers SAR filing obligations.
Question 6: Which regulatory body has primary oversight over crypto commodity derivatives in the United States?
- Securities and Exchange Commission (SEC)
- Office of the Comptroller of the Currency (OCC)
- Commodity Futures Trading Commission (CFTC) (Correct answer)
- Federal Reserve
Correct answer: Commodity Futures Trading Commission (CFTC)
The CFTC has jurisdiction over derivatives markets, including crypto futures, options, and swaps, particularly for commodities like Bitcoin.
Question 7: A DeFi protocol operates entirely through smart contracts with no centralized operator. Under current US law, this MOST likely means:
- It is fully exempt from all financial regulations
- Its regulatory status is legally uncertain and subject to ongoing debate (Correct answer)
- It must register with both the SEC and CFTC
- It qualifies as a bank under federal law
Correct answer: Its regulatory status is legally uncertain and subject to ongoing debate
Regulators have not definitively resolved how decentralized protocols fit into existing frameworks, making DeFi compliance one of the most contested areas in crypto law.
Cryptocurrency Regulation and Compliance 5
A US crypto exchange discovers a customer is on OFAC's Specially Designated Nationals (SDN) list.
What must it do?