Speculation has been mounting that the digital yuan will be used to displace the US dollar and circumvent sanctions. In retaliation, financial institutions can be targeted whereby US dollar payment or financial system access can be sanctioned. If the United States weaponizes the dollar, the digital yuan will not provide sanction protection beyond the status quo. The digital yuan’s true innovation is the ability to manage capital controls and facilitate financial liberalization. Being a programmable currency, the digital yuan enables Mainland China to open its economy more expeditiously than would normally be possible, while providing the regulatory levers to manage monetary and financial stability. Mainland technology companies are instrumental in the circulation of the digital yuan through electronic payment platforms. These same technology companies have recently established virtual banks and stored value facility payment platforms in Hong Kong. This chapter argues that technology is introducing new risks into Hong Kong’s banking system which pose a material risk to financial stability. To manage these risks, financial data supervision and infrastructure is required which currently does not exist. With the recent growth surge and volatility in cryptocurrency markets, the current approach of neglecting financial stability supervision is erroneous and reckless.

Hong Kong is Mainland China’s international financial centre and capital market gateway, being home to the largest offshore renminbi hub. Cross-boundary connect schemes have significantly boosted capital flows between Hong Kong and the Mainland. Hong Kong’s role in the internationalization of the renminbi and offshore investment is supported by cross-boundary financial market infrastructure and complicated by the dual supervisory and regulatory systems in each jurisdiction. Hong Kong and the Mainland operate under the sectoral model with some key design differences. This chapter argues these differences produce cross-boundary macro-prudential and systemic supervisory underlap across the renminbi and connect scheme infrastructure. To overcome design flaws inherent to the sectoral model, both jurisdictions have created composite systemic supervisors. Cross-boundary underlap constricts these composite systemic supervisors from mitigating systemic risk outside their home jurisdiction. Moreover, Hong Kong and the Mainland have begun adopting regulatory technology to enhance financial market supervision. However, technology does not change the functionality of financial market infrastructure nor the cross-boundary supervisory functions. Technology risks are introduced that expand rather than change the supervisory roles. Cross-boundary supervisors should not reduce risk management requirements merely because technology automates compliance requirements or supposedly eliminates orthodox financial risks.