Tokenization Overview

Since the dawn of time, one of the premier challenges of mankind has been the securing and safe sharing of information. They say that knowledge is power and as a result, information has always been a valuable asset. Like all valuable assets, it needs to be protected. In the digital age, data has become almost a form of currency and in some cases can be directly converted to currency. Storing data presents much less of a security challenge than sharing data. Since financial data inherently needs to be shared, however, in order to create a transaction, it makes financial data extremely vulnerable.

Financial transactions have always been challenging to secure. Hard currency can be stolen and once it is gone, it is impossible to prove who the rightful owner is. This gave rise to credit and debit cards or a means of payment that has no inherent value in and of itself. The data contained on the card does, however, and that gave rise to credit card theft and data dumps. All criminals or cybercriminals needed was the information contained on a credit card and they could drain a person's accounts. Since most merchants save the financial data gained with every transaction, all thieves have had to do was find a vulnerability to download the financial and personal data of millions of individuals.

Why Financial Data is Vulnerable

The more institutions that save financial information, the less secure that information becomes. This problem is even further compounded when institutions that implement proper security protocols grant access to financial networks to institutions with much less stringent protocols. The Target data breach, for instance, was actually conducted remotely by exploiting the much more lax security of an HVAC company that had access to Target's financial network. The need to share financial information with other institutions that in turn save that data made consumers, banks and card issuers extremely vulnerable.

On any given day, an individual may pass their financial information on to upwards of 30 different businesses. Each one of these businesses has the ability to store that data and any data that is stored can also be stolen. Some businesses may do their due diligence to secure the data but not all do. Ultimately, however, the responsibility lies with the merchant to secure the data. If they do not store the data securely, there is not a lot that banks or consumers can do. Tokenization is a way of ensuring that merchants are not given information that can actually be used if it were ever stolen.

What is Tokenization?

Tokenization is the creation of a digital token that works like a one-time-use key. The key can be used to unlock certain information rather than giving away the information itself. Tokenization itself is simply the breaking up of long strings of information into smaller blocks or "keys." Tokenization has far broader applications outside of the financial world, but at the moment the most prevalent usage of tokenization is for financial transactions.

The use of tokenization to secure digital transactions on a broad-scale basis started with digital chip or EMV cards but is also the basis of digital wallets like Apple Pay or Google Pay. With tokenization, merchants are not given credit card numbers or other information that can be reused. Instead, a one-time-use code is created and generated for that one transaction. The code or token can be used to complete that one transaction but then is worthless after that. The information can be saved or even stolen, but it is essentially worthless since it cannot be used beyond that single transaction.

Other Applications For Tokenization

While the most predominant use of tokenization is currently for financial transactions, tokenization has much broader applications in the business world. For instance, at current, many businesses divide information into classification levels. Newer or more junior employees only have access to certain levels or classifications of information while more senior employees have access to higher levels or more sensitive information. Once an employee has been granted access to a certain level of information, however, they often have unrestricted access to all of the information granted at that level. Tokenization can help businesses grant single-use access to certain information rather than granting wholesale access to certain levels of information. This allows even junior employees to access certain information as needed and even limits access by senior employees to a case-by-case basis as needed.

Tokenization is also the foundation for cryptocurrency transactions that are administered by blockchain. As blockchain technology expands to offer a variety of services such as smart contracts, tokenization will begin to take a more central role in an even wider range of transactions.

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