What is Tokenization? A Complete Guide

Apr 13, 2022
3 min read

Technological advancements are reaching whole new heights, and humankind is increasingly adapting to these advances. One such path-breaking advance of technology was the internet which transformed the world altogether.

Key Statistics

The global tokenization market is expected to grow at a CAGR of 13.0% from 939.7 million in 2020 to 2380.6 million in 2027.

The market is expected to reach $697.9 million in 2021 in the USA, while China is expected to reach $476.3 million by 2026.

The internet has shrunk spaces exponentially, and we are increasingly getting dependent on it. From our social life to confidential information, everything is online. From our business data to banking passwords, we rely on the internet to keep track of it for us. However, it has also exposed us to a whole new world of privacy and data breach with so much ease. Everything that is online is open to cyber-attacks! But technology has a solution for it too.

With increased cyberattacks and data breaches, a concept of encryption was introduced; however, decryption was an antidote to it, allowing us to navigate back to our data while giving hackers and cyber-attackers access the same. So, what do we do now?

Thankfully, technology never disappoints! We now have a concept called tokenization to ensure privacy and data security without the threat of hackers and cyber attackers!

What is Tokenization?

Tokenization is a risk-reducing and security mechanism whereby the sensitive data is substituted with some random characters with no meaningful value, which is called a token. These tokens are the reference that helps us to map back to the original data using a security system called tokenization System.

In simple words, it's a method to secure our sensitive data in a way that isn't accessible to breach or hack. Let me illustrate it with an example. Your PAN number, 877-44-0279 is substituted with any random value, say, 738-36-6361. The real number is stored in the cloud and token vault while users use the substitute value on a regular basis. The system where we use this never records, transmits, or stores the actual PAN, only the token.

This token is generated haphazardly, without any mathematical or logical relationship with the real data. Therefore, these tokens cannot be breached. However, these tokens retain something from the original data, usually the format or original data length.

Therefore, these tokens can be used for uninterrupted business operations without the threat of cyberattacks and data breaches.

Uses of Tokenization

Tokenization is meant for the protection of sensitive data in such a way that its utility is preserved and data breaches all the while, the original data is never lost. Tokenization is increasingly being used to secure personnel and sensitive data like banking card details, account numbers, emails, passwords, social security numbers, passport numbers, id cards, and business details.

It can even be used for stock trading, loan applications, voter registration, criminal and even medical records. Even organizations are increasingly replacing encryption with tokenization to secure the data on cloud storage.

How is Tokenization Different From Encryption?

Tokenization and encryption both are methods of cryptography used for data protection. However, there is a key difference between the two. While encryption transforms actual data into unreadable ciphertext, which is different in size than the original data, by mathematically using an encryption algorithm and key. The original data leaves the organization in encrypted form. This encrypted data can be retrieved by decryption using the encryption key. On the other hand, tokenization randomly generates a value that is similar in format and size to the original data, called a token, for the original data and stores the mapping in a database. It uses non-decryptable information to represent the original data; therefore, data is not reversible. The actual data never leaves the organization, only the token leaves.

Types of Tokens

There is no single method of classifying tokens; however, Securities and Exchange Commission (SEC) and Swiss Financial Market Supervisory Authority (FINMA) have classified tokens into three main types:

Asset or Security Token: These are the investment tokens that promise a return. These are analogous to economic bonds and equity.

Utility Token: These tokens act as something other than a means of payment example, a discount token on future goods, etc.

Currency/Payment Token: These tokens are specifically created for the purposes of payment for goods and services.

Conclusion

Tokenization substitutes the value with the tokens and a token vault keeps a record of the relationship between the value and its token. The real value is often secured through encryption on the cloud. If and when the actual data is needed, the token is to be submitted to the token vault, which then fetches the actual value after the authorization process. This process is called detokenization and is done only by the original tokenization system. The browsers efficiently perform this tedious task almost instantaneously for users.