What is Tokenization


January 13, 2023

Everyone’s heard the saying that knowledge is power. Some say that the reason knowledge is so powerful is because it’s the one thing that can never truly be taken away from you. However, this can also be a negative. In today’s world, information is very important but at the same time, very sensitive — we’ve all witnessed the dreaded call from our financial institution stating there’s been suspicious activity on our account. Whether it’s our social security number, credit card information, or driver's license, the wrong piece of information in the wrong person’s hands can have severe consequences.

Enter tokenization:

The main concept behind tokenization is to take a piece of important information and associate it with a randomized data string that has no essential or exploitable value or meaning. This randomized data string will act as a token linked to the original information and calls back to the original information whenever the token is referenced. For example, let’s say a person wants to purchase something online using his credit card. Tokenization allows him to send over his credit card information to be saved in a digital vault and receive a token in return to use for future transactions.

Tokenization can do a lot of good in terms of protecting sensitive information. Overall, tokenization introduces a great alternative to traditional data storage and introduces some pretty advanced advantages to data storage in general, some noteworthy ones being:

Enhanced Customer Security — Expanding tokenization to retail and e-commerce sites would extend extra security towards customers and their information which in turn would increase customer trust in the brand or company.

Increased Security for Medical Patients — Tokenizing medical records provides another level of security for confidential patient information and for scenarios covered under HIPAA (Health Insurance Portability and Accountability Act). By substituting electronically protected health information and nonpublic personal information with a tokenized value, healthcare organizations can better comply with HIPAA regulations.

Credit Card and Bank Information — Tokenization solutions provide a way to better protect cardholder data, such as magnetic swipe data, primary account number, and cardholder information. It would be easier for companies to comply with industry standards and better protect client information.

Asset Tokenization — When you mix blockchain and tokenization you get asset tokenization, which is the process of converting ownership rights of a particular asset into a digital token on the blockchain. This means that owners of a residential building could own a token to represent/prove their ownership. Furthermore, because the blockchain is decentralized, asset tokenization makes transferring assets a lot easier and a lot more efficient.

If someone were to talk about tokenization and all of its advantages for twenty-four hours straight, they likely wouldn’t be able to cover everything. Tokenization has helped private information actually stay private and has engineered a way for people to have more privacy in a world where privacy is almost nonexistent. However, there’s still a lot of areas where tokenization could make significant advancements, specifically in the blockchain. Come back next week for part two to learn about how tokenization has specifically been able to work with blockchain.

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