Can Trinidad and Tobago Modernize Its Debt Market with Tokenized Bonds?

As Trinidad and Tobago’s total public debt climbs, reaching near 80% of GDP, concerns about debt sustainability and market efficiency are mounting. At the same time, liquidity in the domestic bond market remains thin, with limited secondary trading, high barriers to retail participation, and legacy settlement systems that add friction and cost. Against this backdrop, a new technological lever is gaining traction globally, tokenization. Tokenizing government bonds involves issuing digital versions of traditional sovereign debt instruments on programmable platforms, such as blockchain or distributed ledgers, where ownership, interest payments, and transfers can be tracked and executed in real time. While this innovation won't reduce the face value of national debt, it offers a compelling pathway to lower borrowing costs, broaden market access, improve transparency, and modernize financial infrastructure.

Globally, countries as well as institutions are piloting tokenized sovereign debt to test its potential in increasing liquidity, shortening settlement cycles, and reaching underserved investors. In the Caribbean context, where many economies face similar challenges of fiscal rigidity, FX shortages, and underdeveloped capital markets, T&T is well positioned to lead by example. By taking measured steps toward implementing a tokenized bond issuance framework, starting with small domestic pilots under regulatory supervision, T&T could become a regional pioneer in digital public finance. This initiative would not only align with its broader digitalization goals , but also signal to investors and multilateral partners that the country is committed to financial innovation and inclusive market development. The tokenization of a government bond begins when a sovereign issuer, such as T&T, opts to issue debt through a programmable digital platform rather than relying on traditional registries and clearing systems. There are two primary models for tokenization. 1)The first is called the native model, where the bond is created entirely online using secure digital technology (like a blockchain), and there’s no paper version. 2) The second is the tokenized or backed model, where the government first issues a regular bond, then a trusted institution (like a custodian) creates a digital copy of it. In both cases, the rules of the bond, like how long it lasts, how much interest it pays, and when you get your money back, are built into smart contracts, which are like automated digital instructions.

Source : BIS

Anyone, from large investors to everyday people, can buy these digital bonds through secure apps or digital platforms. The bonds are paid for instantly using digital money, such as central bank digital currency (CBDC) or other tokenized funds. Once you own a digital bond, you can trade it, use it as loan collateral, or plug it into other financial tools, just like any other modern investment. To make sure the system is safe and fair, governments need strong rules around digital assets, ID checks (KYC/AML), and pilot programs (called sandboxes) to test everything carefully before going big.

So how can this tokenization structure help Caribbean countries like T&T? Currently, Trinidad and Tobago gross debt stands at over TT$108B, the debt/GDP ratio is approaching 80%, narrowing the country’s fiscal room. Its external debt service ratio (external debt) has grown to above 15% of total debt burden.

Source : CBTT

This rising external debt burden is compounded by several structural challenges in how Trinidad and Tobago accesses international capital markets. The country remains highly dependent on a narrow base of foreign institutional buyers, making it vulnerable to shifts in investor sentiment or global risk appetite. External bond issues are often concentrated in large, illiquid tranches, limiting tradability in secondary markets and discouraging broader participation. Price discovery is weak, with minimal realtime trading data once the bonds are issued. Additionally, settlement processes rely on intermediaries like Euroclear or offshore custodians, which increases transaction costs and slows down execution. Manual reconciliation and outdated registry systems further reduce operational efficiency. These factors can result in higher risk premiums being priced into new bond issues. Altogether, they constrain the government's flexibility and increase the cost of managing external debt over time.

Due to these issues some governments from Hong Kong to Switzerland and supranationals like the EIB and World Bank have thus begun issuing tokenized debt, often in small pilots. According to BIS data, tokenized sovereign and corporate bond issuance has reached $8B globally and is accelerating.

Source : BIS

Tokenized government bonds have already demonstrated clear efficiency and cost advantages over their traditional counterparts in early pilot programs. One of the most tangible benefits is improved market liquidity bid/ask spreads on tokenized bonds average 19bps, compared to around 30bps for similar conventional issues, according to BIS analysis. This tighter spread reflects stronger price discovery and reduced friction in trading. Tokenized offerings also tend to lower barriers to entry, with minimum investment sizes dropping from $185,000 to approximately $110,000, making sovereign debt more accessible to smaller institutions and retail investors. Moreover, issuance costs for tokenized bonds are comparable or even slightly lower, despite the technological infrastructure involved, largely due to reduced reliance on intermediaries. The most transformative gain, however, lies in automated settlement and coupon distribution through smart contracts, which reduces manual processing, eliminates delays, and enhances transparency across the life of the bond.

Source : BIS

For smaller countries like T&T of the biggest benefits would be an opportunity to capitalize to being a digital innovator in the Caribbean capital markets means taking bold yet strategic steps to modernize the country’s financial architecture using emerging technologies. By being among the first in the region to explore and implement tokenized sovereign bonds, programmable financial instruments, or even a CBDC linked settlement system, T&T can set a precedent for how small economies can embrace innovation to enhance market depth, transparency, and resilience. Such leadership would signal to global investors, multilaterals, and fintech firms that the country is serious about building next-gen financial infrastructure, one that lowers costs, widens access, and enables faster, safer transactions. This positioning could attract regional custodianship mandates, fintech sandbox participants, and digital asset infrastructure providers, creating a first-mover advantage for T&T while deepening its integration with global capital and technology ecosystems. Something that can primarily benefit its GDP.

However, despite its potential, tokenizing government bonds in T&T presents several important risks that must be carefully managed. Legally, there is currently no formal recognition of digital securities or smart contracts under existing T&T legislation, creating uncertainty around enforceability, investor protection, and dispute resolution. Operationally, the shift to digital issuance would require significant investment in ledger infrastructure, custodial solutions, and smart contract auditing, none of which are currently standard in the public sector. From a market standpoint, liquidity challenges may persist if investor demand is weak or fragmented between tokenized and conventional issues, limiting the effectiveness of tokenization. In terms of financial stability, automated smart contracts could introduce amplified volatility during periods of market stress, particularly if liquidation rules or collateral triggers are poorly designed. Finally, FX risk must be considered if foreign investors participate, capital controls, convertibility limits, and repatriation rules would need to be updated or clarified to ensure confidence in cross-border digital flows. Overall, while tokenization is not a cure all for T&T’s debt challenges, it offers a powerful opportunity to modernize the country’s financial system, lower borrowing costs, and broaden investor access, especially for retail and diaspora communities. With the right regulatory frameworks, infrastructure investments, and pilot programs, T&T can position itself not just as a regional leader, but as a global example of how small economies can harness digital innovation to build more inclusive, efficient, and resilient capital markets.