Subjective anti-crypto decisions in banking may no longer be justified – the U.S. Federal Reserve removes reputational risk from the supervisory model. The removal of reputational risk applies to all supervisory materials, including examination manuals and formal assessment processes. From now on, the focus will shift to specific financial and operational risks: market exposure, liquidity structure, functional segregation, accuracy of metrics, quality of monitoring models, and resilience of internal procedures.
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More on the Removal of Reputational Risk and the SR 95-51 (SUP) Update
More specifically, we are seeing the phased update of SR 95-51 (SUP). This is a key document that defines the approach to rating the quality of risk management and internal controls at banks and bank holding companies. It is important to note that the Federal Reserve is not weakening its expectations for sound risk governance. Rather, the regulator is removing categories that lack formal measurement methodology and do not conform to the principle of supervisory reproducibility.
Previously, banks in the U.S. declined to serve custodial platforms, centralized exchanges, DeFi-focused startups, stablecoin issuers, and even OTC brokers without any documented concerns about financial soundness or violations on the client side. In many cases, it was considered sufficient that the client’s activities might “undermine public trust in the bank.” Whether banks acted out of genuine concern for their reputation or due to indirect regulatory pressure is now less relevant.
From now on, assessments based on associative or reputational factors will be replaced with a strict focus on:
Market exposure
Liquidity structure
Functional segregation
Metric accuracy
Quality of monitoring models
Resilience of internal procedures
This is significant, as these categories can be verified, documented, and justified within a supervisory framework. Moreover, the Federal Reserve is coordinating this change with other federal supervisory agencies, including the OCC and FDIC, to align risk assessment practices across the interagency process.
In practical terms, this means that within CAMEL/BOPEC and related frameworks (including ROCA for U.S. branches of foreign banks), reputational considerations can no longer be used as a legitimate basis for assessment. While this does not imply automatic approval of clients, any refusal must now be based on objective risk metrics. Formally, the changes take effect immediately, and as early as tomorrow, banks will have the opportunity to reassess their client strategies at a policy level.
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Conclusion
Decentralized finance does not replace centralized finance, and some orthodox Web3 enthusiasts may view this as a deviation from the original path. Yet what we’re witnessing is that traditional finance and its regulators are no longer blocking but instead actively integrating crypto assets and working with DeFi providers.
This is Web3 evolution in action – and a rapid one at that – which continues to offer crypto investors and cryptoenthusiasts an expanding range of opportunities. Stay tuned to keep up with the latest developments in crypto, blockchain, and regulation.