Blockchain & Cryptocurrency Integration Flashcards

A fintech company wants to accept stablecoin payments from retail customers. Which stablecoin type carries the highest counterparty risk?

Answer: Algorithmic stablecoins backed only by code and market incentives

Algorithmic stablecoins maintain their peg through algorithms and incentive mechanisms without collateral backing, making them vulnerable to death spirals as demonstrated by TerraUSD's collapse in 2022.

What is the primary compliance challenge for Virtual Asset Service Providers (VASPs) when processing peer-to-peer crypto transactions?

Answer: Identifying beneficial owners and applying KYC/AML controls without central intermediaries

P2P crypto transactions often lack identifiable counterparties, making KYC/AML compliance challenging since VASPs must verify customer identities without traditional centralized checkpoints.

In blockchain-based trade finance, what problem does a 'letter of credit' smart contract primarily solve?

Answer: Automating payment release when pre-defined delivery conditions are cryptographically verified

Smart contract-based letters of credit automate payment when encoded conditions (e.g., shipment confirmation via IoT or oracle) are met, reducing processing time from days to minutes.

What does 'interoperability' mean in the context of multi-chain fintech infrastructure?

Answer: The capacity for different blockchain networks to communicate and transfer assets or data between them

Blockchain interoperability refers to protocols and bridges that enable different networks (e.g., Ethereum and Polkadot) to exchange assets and data seamlessly.

A fintech firm conducts a blockchain transaction analysis and finds a customer's wallet is linked to a sanctioned entity. What is the immediate regulatory obligation under OFAC rules?

Answer: Block the transaction, freeze associated funds, and file a report with OFAC

Under OFAC regulations, when a match to the SDN list is detected, firms must immediately block the transaction, freeze the assets, and report the blocked property to OFAC.

Which mechanism do Proof of Stake blockchains use to punish validators who behave dishonestly or go offline?

Answer: Slashing, which destroys or confiscates a portion of the validator's staked collateral

Slashing is the PoS mechanism that penalizes validators for double-signing or prolonged downtime by destroying part of their staked cryptocurrency, aligning economic incentives with honest behavior.

A fintech company is evaluating blockchain for KYC data sharing between financial institutions. What is the primary advantage of a self-sovereign identity (SSI) model on blockchain?

Answer: It gives individuals control over their own identity credentials without relying on a central authority

SSI allows individuals to hold and selectively disclose verifiable credentials using decentralized identifiers (DIDs), reducing reliance on centralized identity providers while improving privacy.