Tokenization: How It Works, Token Types, Encryption Differences Guide

Tokenization: How It Works, Token Types, Encryption Differences Guide

Everything You Need to Know About Tokenization: What’s the Difference Between Tokenization and Encryption?

The crypto community uses terms like “tokenization” and “encryption” loosely. Many of us don’t realize there’s a significant difference between tokenization and encryption.

Main Differences Between Tokenization & Encryption:

Well, tokenization is the process of replacing any original data, payment-related data, sensitive data, or personal data from business systems using identification symbols (i.e. tokens) that contain all essential data, thereby improving security. Tokenization can add an extra layer of security to a business process. Businesses often use tokenization to prevent credit card fraud, for example. It makes it harder for a hacker to access the sensitive credit card data of customers.

As wallets like Google Wallet and PayPal continue to rise in popularity, tokenization is becoming increasingly important. In fact, tokenization is what secures a significant portion of our financial ecosystem.

Tokenization, however, is not encryption. Tokenization and encryption are two different technologies that are heading towards different goals. Today, we’re explaining what tokenization is and what makes it different from encryption.

Tokenization Versus Tokenizing

It’s important to note there’s a difference between tokenization and tokenizing an asset.

Tokenization is a data security principle where a token with no intrinsic value is used to unlock access to data.

Tokenizing an asset, meanwhile, is the process of breaking an asset into digital tokens. You might break a company’s share, for example, into 100 different digital tokens. You’ve “tokenized” that share. You can sell the tokens, and each token represents 1/100th of that share.

When someone in the crypto community talks about “tokenizing” something, they’re typically talking about breaking that “something” into a bunch of different tokens. When someone talks about “tokenization”, however, they’re referring to the data security principle where tokens are used to decode a random dataset – similar to how encryption works.

What is Tokenization?

Tokenization is the process of protecting data through the use of tokens. Using tokens, businesses can limit the amount of data they need to keep on hand.

Instead of accessing a customer’s credit card data for each and every transaction, for example, a business can process a token that represents that data.

Tokens increase the security of a transaction between a customer and a business. They lower overhead costs for businesses. They make it easier for corporations to comply with standards and regulations across governments and industries.

One important standard, for example, is the fact that the payment card industry is not allowed to store credit card numbers in databases or in point of sale terminals after a transaction is made. To comply with this standard, a merchant needs to incorporate an end-to-end encryption system into their payment processing platform. Or, that merchant needs to partner with a tokenization provider.

A tokenization provider is responsible for maintaining the security of valuable payment information. The provider locks down information by issuing a driver for the point of sale (POS) system. Through this system, the merchant and provider can replace valuable payment data with randomly-generated tokens.

The feature that makes tokens valuable is the fact that they can’t be used outside of a unique transaction. With credit card transactions, for example, the token contains only four numbers from the actual credit card. The rest of the information is encrypted and replaced with alphanumeric symbols. These symbols are a mix of numbers and letters.

Today, tokenization is used to protect more than just payment data. It’s also used to protect voting data, criminal records, medical records, vehicle data, citizenship information, financial information, and more.

How Does Tokenization Work?

With tokenization, the original data is stored in a secure data vault, and the token provides access to that data vault for temporary circumstances.

The vault is separate from business systems. In exchange for storing data within the vault, the consumer receives an undecipherable token. Tokens can be single or multi-use. You might generate a single token for a one-time card transaction, for example, while a company might generate a multi-use token for a customer that plans on making multiple purchases.

Tokenization was designed to replace legacy systems. In older systems, a customer’s credit card information was stored in databases. These databases made it easy for hackers to access information. Once a hacker gained access to the database, the hacker also gained access to all of the data – like the credit card information – inside that database. Tokenization solves this problem because the original data is totally encrypted. The only way to decrypt it is to “detokenize” it using the token.

Detokenization is the unlocking process. Once the data is detokenized, the data is available to be used. The person holding the token – the merchant, for example – can process and access the payment data. While the merchant is accessing and processing this data, the merchant never stores the primary account number – only the token.

What’s the Difference Between Tokenization and Encryption?

Tokenization and encryption have some similarities, but they’re two different processes.

Tokenization takes the original data, randomizes it using the algorithm provided by the tokenization platform, then creates a token that can be used to “detokenize” the random data and make sense of it.

Encryption, on the other hand, takes data and runs it through an algorithm, using an encryption key to transform plain text into cipher text. The only way to access the original data is to decipher it. You can decipher encrypted data using the key, which unlocks the data instantly. Alternatively, you can decrypt the value using special software – it would just take an absurd amount of time or processing power to crack the encryption.

There are disadvantages to encryption. To access encrypted data, you need the key. If you want someone to access your encrypted data, then you need to provide them with that key. For example, if you’re processing a payment, then data needs to be decrypted and encrypted again. This can cause costs to pile up – particularly when auditing encrypted data.

Tokenization, meanwhile, is easier and cheaper to implement. When your data is tokenized, you hold the key that can access all of the data, but the data itself is off your system. That’s important for security: if someone steals the tokens, they can’t get to the original data. If someone steals the original data, then they can’t get a token. Without the data, the token has no value and vice versa.

In the most basic sense, encryption requires more computational power than tokenization. Ideally, a system will use both tokenization and encryption.

Tokenization Versus Encryption

Our friends at had a good explanation of the differences between tokenization and encryption from a technological standpoint. Here are some of the crucial differences:

  • Mathematically Reversible: Encryption
  • Reduces Payment Card Industry (PCI) Scope: Tokenization
  • End-to-End Security: Tokenization
  • Rotation of Keys Required: Encryption
  • Payment Flexibility for Refunds, Chargebacks, Etc.: Tokenization
  • Primary Account Number (PAN) Data Displayed: Encryption
  • Established Security: Encryption
  • Centrally Managed: Tokenization
  • Low Cost Per Transaction: Tokenization

Types of Tokens

It’s difficult to classify tokens into categories. You can say there are single-use and multi-use tokens. However, there are different tokens within each category, including reversible and irreversible tokens, cryptographic and non-cryptographic tokens, and authenticable and non-authenticable tokens, among other varieties.

However, in the context of tokenization for payment processing, tokens can be divided between high-value tokens (HVT) and low-value tokens (LVT).

High Value Tokens (HVT)

High value tokens, or HVTs, serve as fodder or surrogates for primary account numbers (PANs) in transactions. In order for HVTs to function, they must look like an actual PAN. Multiple HVTs can be mapped back to a single PAN and a single physical credit card. These tokens are mostly used to complete payment transactions. An HVT can be bound to a specific device or devices. When an HVT is bound to a specific device – like your smartphone – it allows the tokenization system to flag a transaction as fraudulent based on token usage, physical device usage, and geographic location.

Low Value Tokens (LVT)

Also known as security tokens, low value tokens act as surrogates for actual primary account numbers (PANs) during transactions. However, their purpose is different. Low-value tokens cannot be used alone to complete a transaction, for example. And, in order for a low value token to function, it must match back to the actual PAN it represents. Using tokens to protect PANs becomes ineffective if a tokenization system is breached.

Conclusion: The “Tokenization of Things” is Coming

We’ve had the internet of things (IoT). Next, we might see the “tokenization of things”. We could see a number of industries embrace tokenization.

Cryptocurrencies have already broken the barriers between the digital world and the real economy. Thanks to cryptocurrencies, the internet can be used as a middleman for virtually everything. Companies will likely continue to embrace tokenization as a data security principle, allowing them to save money and boost security while processing sensitive data for customers.