Central Bank of Trinidad and Tobago publishes working paper on how digital money could alter monetary policy transmission

The Central Bank of Trinidad and Tobago published a research working paper examining how digital money, focused on central bank digital currencies (CBDCs), e-money and fixed-price cryptocurrencies, could affect the domestic monetary system and the effectiveness of monetary policy. Using a theoretical Mundell-Fleming framework, it suggests that a directly distributed retail CBDC is the most disruptive design choice, with an interest-bearing CBDC potentially strengthening interest-rate transmission while also increasing bank disintermediation and financial stability risks, and with insufficiently regulated private digital money potentially weakening both stability and policy effectiveness. The paper distinguishes between regulated e-money linked to bank accounts, which it treats as largely equivalent to bank money and therefore limited in monetary policy implications, and privately issued or decentralised e-money that could shift funds out of the banking system and reduce the sensitivity of money demand to interest rates. For externally issued stablecoins and other non-CBDC cryptocurrencies, the analysis highlights risks of currency substitution, increased foreign-currency demand and capital outflows that could pressure the managed exchange-rate regime and international reserves, with interventions potentially tightening domestic liquidity and lowering output. While it characterises current domestic risks as contained given the low uptake of newer payment services and oversight of registered e-money issuers, the paper points to preparatory priorities including stronger cybersecurity, further CBDC research and pilots, greater technical capacity, public education and international policy coordination.