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BNY Mellon Embraces Crypto, But One of Its Units Isn’t So Sure

BNY Mellon announced it will hold, transfer and issue digital currencies in February, in response to client demand.

(Bloomberg) -- BNY Mellon says it’s the first global bank to allow clients to hold, transfer and issue digital currencies. But one of its own asset management units isn’t so sure about Bitcoin.

Bitcoin, the largest cryptocurrency, may not be suitable for most institutional investors because of high volatility, low liquidity, governance challenges and ESG risks, according to Insight Investment, which manages about $1 trillion. Slow and expensive transactions may also hinder widespread adoption, according to Francesca Fornasari, head of currency solutions.

Extreme swings in Bitcoin, which has lost around 46% from its mid-April record of almost $65,000, are hampering its appeal for institutional investors. That volatility was on full display on Wednesday, with the token slumping nearly 5% to $34,480 as of 10:00 a.m. London time.

The cryptocurrency clampdown in China, tightening regulatory scrutiny elsewhere and energy concerns have been powerful headwinds for the digital asset, which is heading for the worst quarter since the last three months of 2018.

“We’re skeptical in terms of the ability of Bitcoin to take over as means of payment,” said London-based Fornasari, whose team provides currency solutions ranging from hedging to absolute returns. Investors seeking to gain exposure can do so via specialist funds which understand the blockchain technology and competitive landscape, she said in an interview last week.

The asset manager is a unit of BNY Mellon, which said in February that it will hold, transfer and issue digital currencies, potentially including Bitcoin. This was in response to a surge in client interest, according to Chief Executive Officer Todd Gibbons. Providing custodial services for digital assets makes sense because they’re going to become an increasingly important part of the investment landscape, Fornasari said.

Insight expects to see a rise of cryptocurrencies to challenge Bitcoin, especially those which solve the speed and cost of transactions, energy usage and volatility, Fornasari wrote in a report published last month. Her team doesn’t trade Bitcoin.

It isn’t alone in being wary. Extreme swings in some digital currencies are damping their allure for Qatar Investment Authority, one of the world’s largest sovereign wealth funds. The volatility makes it prohibitive for a lot of corporate treasurers and institutional investors, according to JPMorgan’s chair of global research.

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Bitcoin can be harder to evaluate than gold given its drastic price swings, making it difficult to be certain of how it will react in an inflationary environment, said Fornasari, who’s been with Insight since 2019 and has covered foreign exchange for 21 years.

“At the end of the day, you should be aware of the fact that if you’re investing in Bitcoin, there’s a whole number of different factors and considerations that are going to affect the value of your investment, that have nothing to do with inflation or inflation hedges,” she said.

--With assistance from Yakob Peterseil.

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