Tokenized stocks are capturing the attention of both traditional finance and the crypto world as a way to make equity markets more accessible. But Fairmint CEO Joris Delanoue believes the industry is heading toward a familiar historical mess. In an interview, Delanoue warned that the current pace of tokenized stock distribution, without corresponding progress in ownership record-keeping and market infrastructure, risks recreating Wall Street's 1960s "paper crisis" — a period when the sheer volume of stock trades overwhelmed the physical settlement system.

What Was the 1960s Paperwork Crisis?

In the late 1960s, Wall Street experienced a massive boom in trading volume. However, the back-office systems responsible for recording trades and transferring stock certificates were still largely manual. The result was a mountain of paperwork that brokers and clerks could not process in time. This "paperwork crisis" led to delays in deliveries, lost certificates, and a wave of back-office errors. By the end of the decade, hundreds of brokerage firms either failed or were forced to merge due to operational chaos. The crisis ultimately pushed the industry to move away from physical certificates and toward the electronic book-entry settlement systems, such as the Depository Trust Company (DTC), which we rely on today.

Delanoue argues that tokenized stocks, while more advanced than physical paper, could trigger a similar crisis if the market fails to learn the lessons of that era. According to the Fairmint CEO, the current trajectory of the tokenized equities sector is heavily weighted toward distribution and marketing, while foundational infrastructure for ownership records and cross-platform interoperability lags behind.

Tokenized Stocks: Solving Real Problems

Tokenization — the process of representing real-world assets on a blockchain — has gained significant momentum. Proponents highlight its potential to offer 24/7 trading, fractional ownership, and a more inclusive financial system. In recent years, major financial institutions have launched tokenized versions of stocks, bonds, and even private equity. These products seek to blend the efficiencies of blockchain with the familiarity of traditional securities.

Fairmint itself is active in this ecosystem, helping companies create "Continuous Security Offerings" (CSOs) where tokens are backed by equity. The company's mission is to enable anyone to invest in startups and other ventures, removing traditional barriers like high minimum investment sizes or limited liquidity. The tokenized stock market, therefore, solves a very real access problem. For issuers, it offers a way to raise capital from a global investor base. For investors, it creates a liquid market for assets that were previously illiquid.

But Delanoue does not believe that access is the only issue that matters. "The industry is moving much faster on distribution than on ownership records and market infrastructure," he said. "We are seeing a race to list tokens, but not enough attention is being paid to how those tokens are legally and technically connected to the underlying stock."

The Difference Between a Token and a Stock

A common misconception in the crypto world is that a token that tracks a stock's price is equivalent to holding that stock. Delanoue is quick to correct this idea. "A token that tracks a stock is not necessarily the stock," he said. The token may represent a derivative claim, an IOU, or a contract based on another entity's custody of the shares. In some cases, the token is issued by a platform that buys the stock and issues a corresponding token. In other cases, the token might be unregistered or operate in a legal gray area.

The critical question, he said, is whether the issuer-authorized shareholder register recognizes the token holder. In traditional finance, the shareholder register is the definitive record of ownership. No matter what any other system says, if you are not on that register, you are not a shareholder. Tokenization can only function as real equity ownership if the token, the underlying share, and the official register are all linked in a way that is legally sound and operationally reliable.

Unfortunately, many current tokenized stock products are not. They may be issued by special-purpose vehicles or utilize custodial arrangements. This introduces counterparty risk. If the custodian goes bankrupt, the token holders could lose their claims. The same issue applies if the issuer's ownership record-keeping is not aligned with the token ledger.

Fragmentation: The New Paperwork Crisis

One of the central concerns highlighted by Delanoue is fragmentation. The current tokenized stock market is made up of many separate platforms, each with its own standards, its own closed systems, and its own private infrastructure. While these platforms are often built on the same underlying blockchain technology, they do not necessarily interoperate with one another. This is analogous to the pre-DTC era, when each brokerage had its own manual records, and transfers between firms required the physical movement of stock certificates.

In the 1960s, the problem was paper moving through the mail. Today, it could be digital tokens trapped in separate systems. If an investor buys tokenized stock on Platform A and wants to sell it on Platform B, they might face a complicated and time-consuming process. Settlement may require manual intervention, or the token may need to be wrapped, unwrapped, and re-wrapped in different standards. This kind of fragmentation can create inefficiencies and risks just as dangerous as the paper backlog of the 1960s.

Delanoue stressed that interoperability will determine whether onchain equities become durable market infrastructure or another source of fragmentation. "We need to think about how platforms connect to each other, how records are shared, and how investors can move seamlessly from one venue to another," he said. "If we don't, we risk building a walled garden model, where each platform is an island, and that is precisely how the paper crisis started."

Learning from the Past

The 1960s paper crisis was not primarily a problem of technology. The technology of the time — the paper certificate — was adequate for the trading volumes of the 1950s. The problem was that technology could not scale to meet the demands of a rapidly growing market. In the current case, blockchain technology has demonstrated that it can scale to handle tremendous volumes of transactions. But the infrastructure around it — the legal frameworks, the ownership records, the cross-platform settlement — is not yet mature enough.

Delanoue points out that the securities industry in the 1970s did not simply throw more paper at the problem. It created a centralized depository and book-entry transfer system that replaced the need for physical certificates. The lesson, he says, is clear: shared infrastructure and standards are essential for market stability.

The modern equivalent would be an industry-wide standard for tokenizing stocks, one that defines how tokens relate to the underlying equity, how shareholder registers are updated, and how transfers take place across different venues. Such a standard would not necessarily require a single centralized entity, but it would require a level of coordination that is currently lacking.

Can the Industry Cooperate?

Rival exchanges building closed systems is a major risk factor. Some crypto exchanges are launching their own tokenized stock products, often using proprietary technologies. While they may claim to be interoperable through blockchain, the user experience often is not. The race for market share may be pushing these platforms to prioritize speed-to-market over collaboration.

However, Delanoue is not entirely pessimistic. The tokenization movement is still young, and there is a window of opportunity to establish better standards. He suggests that issuers, investors, and intermediaries should work together to create open protocols for tokenized equity. He also advocates for greater clarity from regulators, which could help to create a level playing field for responsible players.

"We need to go from a mindset of 'move fast and break things' to one of 'move fast and build robust rails,'" he said. "The financial crisis of the 1960s was a turning point. It forced the industry to modernize. We have the chance to do that proactively, without waiting for a breakdown."

The tokenized stock sector has grown rapidly, and its supporters often celebrate the increasing number of products and platforms. But Delanoue believes that the ultimate test will come when the market faces its first major dislocation. "When assets move in one direction and conditions are volatile, that is when infrastructure failures become visible. That is when we will see whether the market is built to last."

In the meantime, Fairmint is focused on ensuring that its own platform is aligned with the principles of transparency and legal clarity. Delanoue says the company prioritizes the integrity of the shareholder register and works to ensure that its tokens are issued under proper authority. For him, this is not just a compliance exercise but part of building the trust that any successful market requires.

The history of Wall Street shows that market infrastructure often receives little attention during bull markets, only to become the focal point during times of stress. The paper crisis of the 1960s was a painful reminder that finance is based on trust, and trust depends on accurate records. Tokenized stocks have the potential to bring more people into equity markets and to make those markets more efficient. Whether they realize that potential, Delanoue warns, depends not on the number of tokens issued, but on the strength of the architecture behind them.

Source:Coindesk News