If you’ve read about security technologies recently, you’ve almost certainly come across information about tokenization. Here, we’ll take a close look at what makes tokenization different from other methods of keeping things secure, plus why it’s a crucial part of today’s digitally centered society.


What Is Tokenization?

Tokenization is a way of protecting digital information that involves swapping the sensitive parts of it with a placeholder that doesn’t have any identifying or private information. It’s similar to running a document through a shredder. The paper turns into a collection of pieces that are so small, it’s virtually impossible to extract any meaningful information from them.

Tokenization uses the same principle but depends on algorithmic technology to accomplish it. A generated token contains letters, numbers or both, and the string may be the same length as the actual information. Since they represent random, arbitrary data, the info can be in any format that the person requiring the tokenization chooses.

Once a token is generated, an entity that handles the data can use it to identify a person instead of storing their sensitive details. No one — including hackers or any other unauthorized parties — should be able to make sense of the information in its tokenized state. It has to go to another party that can read it by going through a detokenization process. The actual private information is kept in a secure, cloud-based token vault.

One of the most well-known applications of tokenization relates to credit card processing. When a user swipes their card or inserts it into a chip-and-pin reader, either of those actions converts the number and expiration date into a token. Then, once the information is transmitted to a processor, that company can decode the token and use the information to authorize the person’s payment attempt.

Tokenization vs. Encryption: What’s the Difference?

After reading that description of tokenization, you may think it sounds very similar to encryption. Indeed, there are some commonalities, such as that both methods keep data safe from people who shouldn’t see it. However, as we look at tokenization vs. encryption, there is a major difference. Encryption makes the sensitive information available via a key shared between the person who encrypted the data and the party that needs to see it.

Both tokenization and encryption can secure data at rest and in transit. However, encryption works best when the information is in an unstructured format. It’s also better when it doesn’t get exchanged frequently, stored in several places or handled by multiple people.

Why Is Tokenization Important for Businesses?

Tokenization is an excellent way for businesses to eliminate the burdens they’d face after being hacked. It means they don’t store sensitive information on-site in a form that anyone could understand and use for malicious purposes. Using tokenization is a recognized security method that lets companies show they took the proper precautions to keep customer data safe.

Also, tokenization protects against various kinds of fraudulent activities associated with payments. It prevents any wrongdoing occurring during processing and transmission. Also, companies don’t need to adjust their point-of-sale methods to take advantage of the protection tokenization gives. They can simply choose to work with a payment processor that offers it within its scope of services — and today’s leading brands do.

If companies use health care or e-commerce data, they’re likely required to engage in certain precautions to maintain security. Tokenization often plays a substantial role in helping that happen. Then, companies that do business inside of tightly regulated industries can prove to stakeholders that they’re following rules and taking information protection seriously.

How Do Companies Use or Offer Tokenization?

Besides companies like Visa using tokenization during payment processing, some cloud providers offer tools. They allow people to work with cloud-stored data and apply tokenization, so it’s possible to extract value from information without violating a person’s privacy.

If a business works with any sensitive data now or expects to soon, tokenization offers an accessible way for them to meet expectations regarding security. However, companies provide tokens to customers, as well. They do that by selling utility tokens, which give holders access to dedicated services. In one example, a utility token called Filecoin sold utility tokens that granted people access to a cloud storage platform.

One of the standout aspects of utility tokens is that they often dictate the set prices for the service. If a person purchases utility tokens early in a company’s history, they’d likely get the services at a lower price than what might be charged later.

A Bit About Blockchain Tokenization

Tokens also get stored on the blockchain, but they can span beyond representing a person’s details. Some blockchain tokens are for real-world assets, and they prove a person owns physical property or a virtual good. Payment tokens are linked to cryptocurrencies like Bitcoin that keep a record of transactions.

A relatively new development for blockchain tokens concerns tokenized security offerings (TCOs). They allow people to invest in companies or projects, and cryptocurrency brands often use them to raise capital and prove there’s enough demand for their new tokens. Regardless of what a blockchain stores, the information will still be in a randomized format that safeguards sensitive material.

Tokenization Is a Necessity in Today’s Digitally Driven World

Since so much of today’s information exists in the digital realm, hackers have substantial incentives to try and seize it. Although tokenization doesn’t guarantee the safety of content in all possible cases, it’s a worthwhile step to take. It makes it much more difficult for hackers to get useful information.

Author Bio:

Jenna Tsui is a tech journalist who co-owns The Byte Beat and frequently writes about environmental tech, AI, disruptive technology and more. Check out her work on TBB or follow her on Twitter @jenna_tsui.