Questions and Answers
What are blockchain analytical tools?
De-anonymizing technology that analyzes and traces transactions on the blockchain.
Which is a known financial crime risk factor associated with cryptoassets?
Risks relevant to the originator of a transaction and the beneficiary of funds that are linked to a high-risk jurisdiction are known as:
Which cryptoasset exchange poses the greatest risk of money laundering?
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What illicit activity is likely indicated by larger-than-normal virtual asset deposits with an unknown source, followed by conversion to fiat currency?
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What is the most important consideration for ongoing AML and sanctions risk management of a DAO's governance token?
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What would be the expected improvement from a supervisory authority analyzing a VASP's AML policies?
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Which method is most commonly used to add new stablecoins into circulation?
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In blockchain technology, consensus mechanisms are best described as:
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Which is a key characteristic of a decentralized application?
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An analyst is reviewing an Ethereum (ETH) address and observes an approval transaction. Which activity did the user of the ETH address most likely complete?
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Which hypothetical situation would best support the investigator's suspicions of narcotics sales?
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Which type of wallet is known for allowing reduced transparency as well as the emergence of other virtual asset business models or activities, such as initial coin offerings?
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What heuristic should be used to cluster the input addresses in a Bitcoin transaction with many input addresses and one recipient address?
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What is the goal of address clustering?
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The technique of using blockchain analytics to determine whether a Bitcoin address is part of a larger wallet is called:
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BTCs cannot be reversed, canceled, or charged back.
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Which functions fall under the current definition of a virtual asset service provider? (Select Two.)
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All transactions by a decentralized Bitcoin cryptocurrency mixer are conducted jointly between the participants.
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Which is a disadvantage of using an unspent transaction output ledger model as the basis of a virtual asset?
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What does each UTXO represent?
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The UTXO model is simpler to compute than the account/balance model.
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What is one function provided by a blockchain oracle?
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Which type of virtual asset storage is considered most secure?
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How should a financial institution manage AML obligations related to a protocol?
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What is true about network vulnerabilities in terms of technology attacks?
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Data privacy, regulatory, jurisdiction, and dispute resolution risks associated with blockchain are known as?
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When does using a send as opposed to a transfer function in a smart contract create vulnerability?
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Which two factors contribute to vulnerabilities existing in smart contract software?
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How does the Lightning Network operate?
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What is the potential identity of the cryptocurrency address involved in artificial price pumping of NFTs?
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Which type of transaction is most secure?
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What is the primary goal of using smart contracts on a blockchain?
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What is a limitation of a smart contract?
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What are trusted third-party providers of off-chain data to smart contracts called?
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Which activity indicates potential smurfing?
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What is the scheme described when a fraudster convinces a customer to accept a wire transfer and then forward it?
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What is the most crucial step mixers and tumblers perform to hide the origin of funds?
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What key benefit does cryptoasset tracing provide to investigators?
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Which statement accurately describes a hosted wallet?
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Who stores the encrypted private keys with a cloud wallet?
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What does the first transaction in a new block show?
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What should you do if you forget your login credentials on an online self-hosted wallet?
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What is the best description of block halving?
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A pseudonymous cryptocurrency has which characteristic?
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Which feature is true of cryptoasset trading?
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What is the best description of clustering?
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Which statement about coin tracing is correct?
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Which financial institution or organization would bear the liability of offering sovereign cryptocurrencies to the public?
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What triggered the creation of Bitcoin?
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Which circumstances should a compliance officer consider as part of a review of a bank's smart contracts in the lending division?
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Which are the most critical risk factors relating to a decentralized finance project or smart contract?
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Which red flags would lead the VASP to file a suspicious activity report? (Select Two)
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According to the Financial Action Task Force, which red flag is most indicative of an attempt to conceal the source of funds?
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Virtual asset red flags stem from factual characteristics, behaviors, patterns, and contextual factors.
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What is the primary purpose of money laundering?
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Why do criminals divide their total profits into smaller parts?
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Which of the following is a feature of terrorist financing?
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Which method of sanctions evasion uses the technique of transshipment?
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Which sanctions evasion technique involves removing key identifying information from payment messages?
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Which of the following is an indicator of fraud?
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Which factor about a cryptocurrency investment firm is considered a red flag?
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Some industries are at higher risk for bribery than others, especially those in which commercial success is driven by getting approval from government entities.
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Which of the following is an example of tax avoidance?
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Which type of cybercrime involves receiving a legitimate-appearing email asking for your login credentials?
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In the case of a medium risk customer who quickly transfers virtual assets after a deposit, which red flags are most relevant? (Select Two)
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What activity is unique to investigators at cryptoasset firms compared to non-cryptoasset firms?
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What are the three lines of defense for managing AML risk for virtual asset service providers? (Select Three)
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Which factors are red flags for a known crypto-related typology? (Select Two)
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How could non-fungible tokens (NFTs) be vulnerable to financial crime?
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Which situation indicates a high risk of tax evasion using cryptoassets?
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Which internationally recognized guidelines have improved transparency of cryptoassets?
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Cybercriminals exploit targets for cryptocurrency crimes by misrepresenting what?
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Per the Financial Action Task Force's Recommendation 10, what is the threshold for occasional transactions for virtual asset service providers?
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Which non-governmental body published guidance for risk management frameworks?
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Regarding negative media coverage, what is the most significant reputational risk outcome for a bank fined for AML failures?
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Which type of risk can result in the loss of a company's standing due to public failures in AML compliance?
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What is a de-anonymizing technology that can help lower money laundering risk?
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Which factor is most impactful to a virtual asset service provider's risk appetite?
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Which illicit activity does this transaction monitoring alert most likely indicate?
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How could non-fungible tokens (NFTs) be vulnerable to financial crime?
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What is an altcoin?
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An initial coin offering (ICO) of utility tokens provides which incentive to investors?
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What is the main difference between asset-backed stablecoins and algorithmic stablecoins?
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How are central bank digital currencies (CBDCs) different from stablecoins?
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Which business model would be considered a virtual asset service provider (VASP) under FATF's definition?
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Which statement is true about crypto ATMs?
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Which one of the following is an advantage of a decentralized exchange (DEX)?
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Which description applies to a centralized lending platform?
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Why might regulators focus on virtual asset service providers (VASPs) rather than decentralized finance (DeFi)?
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What do decentralized applications (dApps) and decentralized autonomous organizations (DAOs) have in common?
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Which of the following statements is true of the types of blockchains?
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What does the immutability feature of blockchain mean?
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Which of the following statements is true of the characteristics of cryptoassets?
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Which of the following statements best describes a miner's role in the blockchain operation?
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What is the primary benefit of joining a mining pool?
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Privacy-centered cryptoassets are best described as:
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Why is the Bitcoin network and its native cryptocurrency, Bitcoin, significant in the history of cryptoassets?
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What is the primary difference between a native cryptocurrency and a token?
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What does the term 'non-fungible' mean in regard to non-fungible tokens (NFTs)?
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What is the most crucial step mixers and tumblers perform to hide the origin of funds?
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Study Notes
Virtual Asset Service Providers and Risk Appetite
- A virtual asset service provider's (VASP) risk appetite is most influenced by company policy.
- Employee count, age of business, and corporate branding are other factors but less impactful.
Illicit Activities in Transaction Monitoring
- Larger-than-normal deposits from unknown sources followed by fiat conversion typically indicate money laundering.
Vulnerabilities of NFTs
- Non-fungible tokens (NFTs) can be manipulated by criminals using tainted funds to create legitimate-looking sales records on the blockchain.
Understanding Altcoins and Tokens
- Altcoins refer to any cryptocurrency other than Bitcoin.
- Utility tokens provide future redemption for products or services related to the project.
Differences in Stablecoins
- Asset-backed stablecoins derive value from collateral, while algorithmic stablecoins' value is determined algorithmically.
Central Bank Digital Currencies (CBDCs) vs. Stablecoins
- CBDCs hold legal tender status, unlike stablecoins, which are pegged to external values but lack such status.
FATF Definition of VASPs
- VASPs are entities offering safekeeping of cryptoassets as their primary service.
Crypto ATMs
- Benefits of crypto ATMs include transaction ease, speed, and privacy, although they are required to collect customer identifying information.
Decentralized Exchanges (DEXs)
- DEXs reduce the risk of theft and cybersecurity attacks due to their decentralized nature.
Centralized Lending Platforms
- A key characteristic is that borrowers lose control of their assets when depositing into custodial wallets.
Regulatory Focus on VASPs
- Regulators often target VASPs instead of DeFi due to DeFi's lack of a central legal entity.
dApps and DAOs
- Both decentralized applications (dApps) and decentralized autonomous organizations (DAOs) are designed to operate autonomously.
Characteristics of Blockchains
- Public blockchains are permissionless and non-restrictive, allowing open participation, while private blockchains are restricted.
Immutability of Blockchain
- Immutability means data recorded on the blockchain cannot be changed or removed, providing security and transparency.
Cryptoassets and Hack Resistance
- Many cryptoassets use private and public keys, making them resistant to hacking.
Miners in Blockchain
- Miners validate transactions between senders and receivers, leveraging computational power to verify and record transactions on the blockchain.
Mining Pools
- Joining mining pools enhances the likelihood of earning rewards by combining resources to tackle mining challenges collaboratively.
Privacy-Centered Cryptoassets
- These assets do not disclose sender or receiver information, ensuring user anonymity.
Significance of Bitcoin
- Bitcoin is recognized as the first decentralized cryptocurrency, established in 2009, paving the way for future crypto innovations.
Native Cryptocurrencies vs. Tokens
- Native cryptocurrencies are inherent to their blockchain, while tokens are built on existing blockchains for various utilities.
Non-Fungible Tokens (NFTs)
- NFTs are unique assets that cannot be exchanged on a one-to-one basis, distinguishing them from fungible assets.
Mixers and Tumblers
- Mixers obscure the origin of funds by altering amounts during transactions, making it challenging to trace the initial source.
Cryptoasset Tracing
- Tracing facilitates the identification of patterns in fund flows, aiding investigators in uncovering illicit activities.
Hosted Wallets
- Hosted wallets are controlled jointly by the user and a virtual asset service provider (VASP), blending user control with third-party support.### Hosted Wallets
- Hosted wallets, also known as custodial wallets, are managed by both users and a virtual asset service provider (VASP).
- VASPs secure and manage users' private keys while validating transactions.
- Beginners often prefer hosted wallets for ease of use compared to non-hosted wallets, where users maintain full control over their private keys.
Cloud Wallets
- In cloud wallets, encrypted private keys are stored by the service provider on remote servers.
- This arrangement poses risks such as vulnerability to hacking and theft.
- Cloud wallets are favorable for users seeking third-party management of their digital assets.
Blockchain Transactions
- The first transaction in a new blockchain block is called a coinbase transaction, rewarding miners for their validation efforts.
- This unique transaction creates new bitcoins and does not contain any inputs.
Recovery of Online Wallets
- If login credentials for an online self-hosted wallet are forgotten, users can recover it using a recovery phrase (seed phrase).
- Keeping the recovery phrase secure is crucial, as loss of this phrase can prevent access to the wallet.
Block Halving
- Block halving reduces the issuance rate of new cryptocurrency coins by half after a specific number of blocks are mined.
- This mechanism is designed to control inflation and ensure scarcity, thus increasing value over time.
Pseudonymous Cryptocurrencies
- Pseudonymous cryptocurrencies protect user identities but allow transactions to be traced on the blockchain.
- While not fully anonymous, they utilize pseudonyms instead of real names.
Cryptoasset Trading
- Cryptoasset trading operates continuously, 24/7, across global markets.
- This decentralization requires traders to be well-informed of local regulations, as this banking environment varies significantly by region.
Clustering in Blockchain
- Clustering involves grouping multiple cryptocurrency addresses used in a single transaction input, indicating they likely belong to a single wallet owner.
- This technique helps in blockchain analysis, aiding the identification of fund flows.
Coin Tracing
- Cryptocurrency transactions can be traced using analytical tools, providing transparency, although some privacy-focused coins may limit traceability.
- Paid blockchain software analytic tools enhance tracing capabilities beyond mere exchanges.
Sovereign Cryptocurrencies
- Central banks bear the responsibility and liability for issuing sovereign cryptocurrencies, ensuring stability and security for these government-backed digital currencies.
Creation of Bitcoin
- Bitcoin's creation was largely motivated by a decline in trust towards banks following the 2008 financial crisis, emphasizing the need for a decentralized monetary system.
Risk Review of Smart Contracts
- Key considerations in evaluating smart contracts include the absence of a code audit and the credibility of the organization behind the lending protocol.
Decentralized Finance Projects Risks
- Critical risk factors for decentralized finance (DeFi) projects encompass concentration of governance tokens, existence of admin keys, and potential smart contract failures.
Stablecoin Circulation
- New stablecoins commonly enter circulation via minting against fiat currency, maintaining a fixed value in relation to real-world assets.
Consensus Mechanisms
- Consensus mechanisms are algorithms that ensure all nodes in a blockchain network synchronize data and maintain security, aiding in transaction validation and preventing double-spending.
Decentralized Applications (dApps)
- dApps operate without ownership or central authority, utilizing peer-to-peer networks and smart contracts for transaction processing, emphasizing transparency and lack of censorship.### Decentralized Applications (dApps)
- dApps run on a blockchain and utilize open-source code.
- Operate autonomously through smart contracts.
- Characterized by the absence of ownership, signifying decentralization.
Ethereum Approval Transactions
- Approval transactions grant smart contracts permission to access user balances.
- These transactions are crucial for decentralized finance (DeFi) applications.
- Users must provide explicit permission for smart contracts to spend tokens.
Investigative Context in Cryptoasset Transactions
- Suspicion of drug sales on the dark web can be substantiated by financial patterns.
- Incoming wire transfers from known drug-producing locations strengthen suspicions.
- Other testimonies or financial behaviors are less directly indicative of illicit activities.
Privacy Wallets in Cryptocurrency
- Privacy wallets reduce transaction transparency and support various virtual asset activities.
- Particularly facilitate operations like initial coin offerings (ICOs).
Bitcoin Address Clustering
- Common spend clustering identifies input addresses linked to a single entity.
- Useful for analyzing transaction graphs and detecting patterns indicative of controlled entities.
Goals of Address Clustering
- Aggregates addresses related to a single entity, aiding in the identification of illicit behavior.
- Enhances the accuracy of anti-money laundering (AML) risk assessments.
Techniques in Cryptocurrency Analysis
- Address clustering helps determine if an address belongs to a larger wallet by analyzing transaction patterns.
- Helps in identifying illicit financial activities through grouped addresses.
Bitcoin Transaction Characteristics
- Bitcoin transactions are irreversible once confirmed and cannot be canceled.
- Transactions require possession of a private key to be executed.
- Bitcoin can be subdivided into smaller units, specifically satoshis.
Functions of Virtual Asset Service Providers (VASPs)
- Facilitate transactions between virtual assets and fiat currencies.
- Conduct exchanges between various forms of virtual assets, as defined by regulatory bodies.
Decentralized Bitcoin Mixers
- Transactions in decentralized mixers are conducted collectively among participants.
- Employs protocols like CoinJoin for increased transaction privacy.
UTXO Model Disadvantages
- The complexity of computation is a key drawback of the unspent transaction output (UTXO) model, making scalability more challenging.
Blockchain Oracles
- Blockchain oracles connect smart contracts with real-world data, providing functions like posting real-time cryptocurrency prices.
- Serve as a bridge between blockchains and external data sources, enhancing the functionality of smart contracts.
Security in Virtual Asset Storage
- Hardware wallets are considered the most secure method of storing virtual assets due to their resistance to hacking and offline storage capability.
- While paper wallets are secure, they are prone to user errors.
AML Compliance in Crypto Platforms
- Financial institutions can delegate the implementation of AML obligations to involved legal entities.
- Risk mitigation is vital, and ignoring it is not a viable practice.
Network Vulnerabilities in Blockchains
- Smaller networks are easier to attack if they lack sufficient countermeasures.
- A higher percentage of honest nodes contributes to network safety against attacks.
Legal Risks in Blockchain
- Legal risks encompass data privacy, regulatory challenges, and dispute resolution issues.
- Blockchain technology presents unique legal uncertainties that businesses and regulators must navigate.
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Test your knowledge with these flashcards for the CCAS Certified Cryptoasset Anti-Financial Crime Specialist Certification. Each card covers key concepts related to risk management and transaction monitoring in the realm of virtual assets. Perfect for candidates preparing for the certification exam.