The tokenization of traditional stocks is often described as the next frontier for digital assets, promising instant settlement, round-the-clock trading and broader access to global markets. But one industry executive warns that the sector is hurtling toward a familiar disaster: Wall Street's infamous 1960s "paperwork crisis."

Joris Delanoue, CEO of Fairmint, a platform focused on tokenized equity, argues that the current pace of innovation is repeating the mistakes of an era when soaring trading volumes overwhelmed manual processing systems. In an exclusive interview, Delanoue expressed concern that tokenized stocks are being distributed far more rapidly than the infrastructure needed to record ownership, clear transactions and reconcile holdings across different platforms.

What was the 1960s 'paper crisis'?

The phrase "paperwork crisis" refers to a period toward the end of the 1960s when the American stock market nearly broke down. As trading volumes increased dramatically, brokerage firms were buried under physical stock certificates and paper-based transfer orders. Back-office operations, often run by teams of clerks manually updating ledgers, could not keep pace. By 1968, many firms faced massive backlogs, misplaced certificates and reconciliation failures. The crisis forced the Securities and Exchange Commission and the industry to reimagine how securities were held and transferred, eventually leading to the creation of the Depository Trust Company in 1973 and the modern electronic book-entry system.

Delanoue draws a direct parallel to the current state of tokenized equities. "We are building the equivalent of the late-1960s back office in real time," he said. "The distribution side is moving extremely fast, but the ownership record side remains fragmented. It's not clear that the market understands the dangers."

Tokenized stocks: a real problem, but a new set of risks

Tokenized stocks are digital representations of equities issued on a blockchain. They allow investors to buy fractional shares of companies using digital wallets, bypassing traditional brokers and geographic restrictions. The market has grown quickly, with projects promising to "tokenize everything" and platforms competing to list tokenized shares of major companies such as Tesla, Apple and Coinbase.

Proponents note that tokenization can lower costs, increase transparency and make it easier for a global pool of investors to access U.S. equities. For startups like Fairmint, tokenization also offers a way for private companies to create liquid markets for their own shares without a traditional initial public offering.

But Delanoue argues that the industry is "solving a real access problem while ignoring the plumbing." In a tokenized stock transaction, the buyer and seller may receive instant confirmation on-chain, but the official shareholder register of the issuing company often remains off-chain, managed by a traditional transfer agent. The token marketplace, the custody network and the corporate ledger all operate on separate rails with different rules, creating the exact type of silos that plagued the 1960s.

A token is not the stock

One of the most important points in Delanoue's warning is the distinction between a token and an actual stock. "A token that tracks a stock is not necessarily the stock," he said. "The critical question is whether the issuer-authorized shareholder register recognizes the holder."

This distinction is often blurred in marketing materials. Many tokenized stock products are actually contracts or derivatives that promise to pay the economic value of a share, but they do not transfer the underlying equity in the company. If the issuer does not recognize the buyer as a shareholder, then the buyer may have no voting rights, no direct claim on dividends and no legal standing in a bankruptcy. The only guarantee is the promise of the counterparty that issued the token.

Delanoue points out that even in cases where the token is intended to represent a real share, the legal and operational layers linking the token to the official register are often fragile. "You could have a perfect token, but if the transfer agent has a different record, you don't own the stock," he said.

Fragmentation and interoperability

The biggest risk, according to Delanoue, is not any single platform failure but the fragmentation of the market into competing ecosystems that cannot easily communicate with one another. If exchange A issues a tokenized Apple share and exchange B issues a different tokenized Apple share, there is no guarantee that the two tokens are fungible. Each may be backed by a different arrangement, subject to different legal terms and recorded on different blockchains.

In the 1960s, the problem was physical certificates scattered across brokerage firms. Today, the problem threatens to be tokens scattered across incompatible ledgers and settlement systems. The result could be a form of "digital paperwork crisis," where reconciliation between platforms becomes nearly impossible as transaction volumes grow.

Delanoue argues that the solution lies in interoperability standards. "If every exchange builds a closed system with its own token standard, we are just creating a new version of the same problem," he said. "Interoperability, rather than rival systems, will determine whether onchain equities become durable market infrastructure or another source of fragmentation."

The role of standards and regulation

Some industry groups and startups have begun work on standards for security token issuance and transfer. The ERC-1400 standard, for example, was designed early to represent securities on Ethereum, but it has not gained universal adoption. Newer protocols are exploring ways to allow tokenized assets to be portable across platforms while still honoring the legal constraints of the underlying security.

Regulators, meanwhile, are watching closely. In the United States, the SEC has not yet provided a clear framework for tokenized equities. The agency's enforcement decisions in the crypto space have been inconsistent, and the leadership is in flux. In Europe, the DLT Pilot Regime allows for the operation of distributed ledger-based securities settlement systems, but it remains experimental. Japan and other Asian jurisdictions have also been active in promoting tokenized asset markets.

Delanoue says that regulation may actually help prevent the crisis, if it forces companies to think about the holder of record. "The best outcome is that regulators require clarity on who owns the stock. If the issuer has to certify that the token corresponds to a recognized shareholder, the market will be forced to build the infrastructure properly."

What tokenized stock issuers can do now

Before the market grows further, Delanoue recommends that issuers of tokenized stocks take several steps. They need to establish that the token is clearly linked to the official shareholder register. They should consider using qualified custodians and transfer agents that are integrated with the token protocol. They must also communicate transparently to buyers about what exactly they are purchasing: a legal share, a security token with intermediate legal structures, or a synthetic exposure.

He also encourages the building of a shared settlement layer for tokenized assets. Instead of each market creating isolated liquidity pools, companies could work with neutral infrastructure providers to ensure that a token issued in one venue can be redeemed, transferred and recorded in another. Without such common rails, a thriving tokenized stock market might end up being a source of systemic risk rather than a tool for democratizing finance.

The comparison to the 1960s is a useful reminder that innovation can easily outpace operations. Back then, the industry responded by creating central depositories, book-entry ownership and standardized message formats. Today's response may involve blockchain-based registries, universal token identifiers and legally recognized on-chain transfers. But the clock is ticking.

"There is a narrow window to get this right," Delanoue said. "If we wait until the backlogs and errors emerge, the industry will lose the trust of investors and regulators. The infrastructure has to catch up with distribution before that happens."

Source: Coindesk News