Are you a digital entrepreneur or investor that wants to know more about tokenization?
Most of the digital investments and assets are going into the era of being tokenized to increase their liquidity and promote transparency. However, only a few understand tokenization to an extent.
So in this article, I’m committed to explaining in detail all you need to know about tokenization.
What is Tokenization
Tokenization is the process of turning sensitive data into non-sensitive data also called tokens that retain all the essential information.
Tokenization can also be the process of removing or deleting sensitive data from your business systems by replacing them with undecipherable tokens which is stored in a secured data vault.
Going forward, according to Wikipedia, tokenization is the process s of substituting sensitive data elements with non-sensitive equivalent that has no extrinsic meaning or value called tokens.
Additionally, the PCI Council defines tokenization as a process which the primary account number is replaced with a surrogate value called a token. Unlike encrypted data, tokenized data is undecipherable and irreversible. This is because there is no mathematical relationship between the token and its original number.
In a nutshell, tokens cannot be returned to their original forms.
What is a Token?
A token is a very simple piece of data that replaces another valuable piece of information. Tokens can also be useful when they represent something bigger. This is because they don’t have a value on their own.
What is the Purpose of Tokenization?
The purpose of Tokenization is to replace sensitive data, typically payment card or social security numbers with a randomized number that has no value on its own.
Although, this differs from encryption where a number is mathematically changed but its original pattern saved within the new code. This is known as format preserving encryption.
What is the Goal of Tokenization?
The goal of tokenization is to remove original sensitive personal data or payment from your business systems replacing each of them with a set of undecipherable tokens. These are then stored in the original data in a secured cloud vault, which stand separate from the business systems.
For instance, tokenization in government protects your credit card details in your social security data. When you access a payment using tokens stored in your systems, only the original social card tokenization can swap the token with the corresponding primary account number (PAN) and send to the payment processor for authorization.
You must note that your system can never transmits nor record or store the PAN. Only the token does.
However, no technology can guarantee the prevention of a breach in the data in the process of transmitting. But a well-built cloud tokenization platform can prevent the exposure of sensitive data. This helps to protect your information (personal or financial) from been attacked by fraudsters.
What are the Examples of Tokenization?
Tokenization is used to safeguard all kinds of sensitive information in:
- Medical records
- Social security numbers
- Driver’s licenses
- Bank accounts
- Criminal records
- Financial statements
- Stock trades
- Loan applications
- Voter registrations, and other types of identifiable information (PII).
Additionally, Tokenization is often used to protect information and sensitive data like account information which is handled by a payment processor.
Tokenization is been applied to payment processor in its different forms and cases. It can be in:
- Mobile wallets like Apple Pay and Android Pay
- Ecommerce sites, and
- e-financial online businesses.
How is Tokenization Created?
Tokens can be created in three major ways:
- Using a mathematical nonreversible function such as a hash function.
- Using a mathematically reversible cryptographic function with a key.
- Using an index function or randomly generated number.
Yes, some tokens can be vaultless. Instead of storing sensitive information in a secured database, vaultless tokens are stored using an algorithm.
The simple gist here is that, if a token is reversible, it simply means it is not stored in a vault.
What is Tokenization of Assets?
The tokenization of assets refers to the process of issuing a blockchain token, specially a security token that digitally represent a tradable asset. It is similar with the traditional process of securitization, but this process involves a more higher modern twist.
These security tokens are created through a type of Initial Coin Offering (ICO) called Security Token Offering (STO). This STO produce different tokens such as equity, utility or payment tokens.
Additionally, a STO can be used to create a digital representation (security token) of an asset. This means that a token can be used to represent share in a company. Also, it can represent ownership of a piece of estate or participation in an investment fund. And, these security tokens can be traded on the capital or money market.
What Assets can be Tokenized?
The following assets can be tokenized.
1. Real estate
Tokenization of real estate allows you to have a fractional ownership of the whole asset. This opens the door for an increased market participation. It expands the real estate market thereby producing greater capital.
2. Private equity shares
Tokenization of equity shares allows companies to interact with shareholders by providing all information on a single immutable ledger. It allows you as a shareholder to have greeter transparent ownership and authenticity to run trades in the secondary market.
3. Physical goods
Physical assets like wine, artworks and furniture can be tokenized. This offers provenance to the goods. it also allows for lending and price discovery through the blockchain transparency.
Converting commodities into tradeable digital assets. It brings about increased liquidity and lesser barriers. It goes ahead in proving greater and newer market opportunity for the underlying commodities.
Is Tokenization the Future?
The world is moving toward the blockchain technology. It is evitable the future of all. Matthew Roszak (the man who gave Bill Clinton and Richard Branson their first Bitcoins) said, “tokenization brings one of the greatest generational opportunities for investors and entrepreneurs”.
It allows entrepreneurs the opportunity to develop and expand in this decentralized open source market without little or no barrier.
How is Tokenization Important?
The advantages of tokenization to both investors and buyers include:
- It offers potential for a more efficient and fairer financial world by greatly reducing the friction involved in the creation, buying and selling of securities.
- Provision of greater liquidity which produce greater value in the represented assets.
- More accessible: Tokenization open investment up to a much wider audience. Tokens are highly divisible, meaning investors can purchase tokens that represent small percentage of the underlying assets.
- Faster and cheaper transactions: Because the transaction of tokens are completed by smart contract, certain parts of the exchange process is automated. This automation process reduces the number of intermediaries needed to complete the transaction process. Thereby making it faster and cheaper.
- More transparent: Through tokenization, a token is capable of having the token holders’ rights and legal responsibilities embedded directly onto the token, along with an immutable record of ownership. This allows you to know who you are dealing with and their rights. it makes transaction more transparent.
Difference Between Tokenization and Encryption
Tokenization and encryption are mostly confused together. Although similar in some ways.
Both are often mentioned together referring to securing of information which is being transmitted or stored in the internet. Also, both helps your organization to meet up with your data security policies and help satisfy regulatory requirements under PSCL DSS, ITAR, HIPAA, HITECH, GLBA and EU GDPR.
Additionally, both are used for effective data obfuscation technology, but they have slight differences in their protocol.
Encryption mathematically transform a plain text using algorithm and key, while tokenization generates a token value for plain test and store the mapping in n database.
Encryption is used for structured field as well as unstructured data such as file, while tokenization is used for structured field such as payment cards.
Additionally, in Encryption, the original data leave the organization in encrypted form while in tokenization, original state leaves the organization satisfying the organization’s compliance requirements.
What is the Reversal Process of Tokenization
The reversal process of Tokenization is called Detokenization.
Detokenization is when you exchange the token for the original number. Detokenization can be done only by the original tokenization system. There is no other way to obtain the original number from just the token.
Tokens can be single-use (low-value) for operations such as one-time debit card transactions that don’t need to be retained, or they can be persistent (high-value) for items such as a repeat customer’s credit card number that needs to be stored in a database for recurring transactions.
If a breach of a tokenized environment occurs, the exposed data is worthless to cybercriminals, virtually eliminating the risk of data theft.
Challenges of Tokenization
One of the major challenges of tokenization is regulatory permit. Tokenization works on the blockchain protocol, which simply means it totally decentralized without any central control. And, most security regulations are technological agnostic as most of their regulations fight against assets tokenization.
Although, tokenization is of great advantage not only to you but to your organization, you shouldn’t forget that the processes are handled by machines automated by humans. What I mean is that, sometimes, human error may interfere, malware dysfunction may happen. It may be hacked or something. In all these, one thing is that you can never lost a data in tokenization. For it is stored in the cloud and it can never be totally lost even though attacked.