Entrepreneurs have used tokenization in start-ups and existing payment solutions. What can larger enterprises use it for? Is it time to tokenize business data, and why? What’s the difference between tokenization and anonymization, and which one is better?
Alex Lysak answers some of the vital questions you might have straightforwardly and understandably. He specializes in blockchain technologies and cryptocurrency applications. He shares his expert Scanteam opinion on how enterprises can benefit from tokenization.
What Is Tokenization?
Tokenization definition: It’s the process in which the system replaces sensitive data with symbols that are uniquely identifiable. The characters keep all the essential information while protecting their safety and security.
What’s the Difference Between Tokenization and Anonymization?
It’s a small yet significant difference. Tokenization replaces part of the data and hides it with a symbol while a specific part of the original data is still visible. Anonymization hides the information entirely behind symbols or terms.
The Benefits of Tokenization in Enterprises
Minimizes Data Storage Needs
It’s the perfect solution for minimizing onsite data storage requirements. Small and medium enterprises are already using tokenization very successfully. It decreases the bulk of the data that it needs to store on hand.
The tokenization of credit card information is the main immediate benefit for small and medium businesses. It reduces the amount of data it needs to store drastically and instantly affects the bottom line cost. The cost savings are not only in the required servers within the organization but, ultimately, the degree of cybersecurity needed to safeguard it all.
Increased Data Security for Consumers
Tokenization is a superior technology to increase e-commerce and credit card security. Simultaneously, it decreases the complexity and cost of remaining compliant with government regulations and standards.
Online data breaches cost the financial and retail sectors millions of dollars annually. Retailers are amongst the highest targeted industries that hackers infiltrate to capitalize on their crimes. If you’ve ever shopped online, you’ve been at risk if the retailer doesn’t have stringent security protocols in place to safeguard your information.
The threat is not only external. Employees can breach security from within an organization if your payment and personal data aren’t stored securely. Tokenized credit card and social security numbers limit access by the frontline staff to your information. It minimizes the possibility of identity theft instantly.
Quicker Compliance to Payment Regulations
Any business that offers credit or debit card payment options has to comply with the PCI DSS (Payment Card Industry Data Security Standard). With the tokenization of credit card information, the business achieves and maintains industry compliance much quicker.
The PCI DSS protects and governs personal data while stored, up to the point where the provider deletes it again. Tokenization can accomplish this compliance quicker because the most sensitive and critical cardholder data is never in direct contact with your systems to begin with.
Credit card tokenization isn’t a magic wand that fulfills all compliance requirements. It’s, however, much easier to work with a PCI-compliant operator. If your payment vendor offers tokenization as an integral part of their services, it does cut through a lot of red tape on your behalf.
Business can Tokenize Assets
It’s a fascinating aspect of the benefits of tokenization. Enterprises can tokenize entire asset pools, whether its natural resources such as oil, gold or diamonds, or even property and financial instruments. It can convert it all to tokens representing the whole or part of the actual entity.
The popular cryptocurrency, Ethereum, recently tokenized a $30 million penthouse apartment on its blockchain, making history in the process. The trade possibilities are endless and extremely exciting. Tokenization cuts out lengthy and expensive processes by dividing up non-liquid assets into tokens quickly and effortlessly for trade purposes.
The freedom created by this process of the tokenization of fixed assets has a massive impact on the trading of shares for both sellers and buyers. A corporation’s property portfolio can now be managed as tokenized values to all shareholders while minimizing illiquidity premiums. Simple, clean, and clear-cut.
Decentralizing Parts of an Enterprise for Ownership
There are various methodologies in which an enterprise can tokenize a business model. It can do it as a whole or semi-decentralized. The main objective of implementing such a strategy is to make it more transparent, accessible, and flexible to potential shareholders.
It does it by issuing security tokens to create multiple ownership parcels available to the public. And STO (security token) represents part ownership of the actual business entity. An ICO (utility token) means the enterprise’s products or resources for ownership by the public.
Fully Decentralized Entity
Although this business model is more complex, the benefits are far-reaching for future shareholders. An enterprise can originate as a decentralized infrastructure by tokenizing each part of its development.
The group of people or the legal business entity that promotes tokenization blockchain initiatives will own a share of each asset’s created value. The tokens that remain in circulation enables business that yields exclusive governance over time of said initiative. A current model that uses this model is Bitcoin and has proven the potential success of blockchain assets’ tokenization.
A fully decentralized and tokenized business entity creates favorable stakeholder markets. It’s the same concept as a stock exchange listing.
Low-Risk Investment Models
Early-stage venture investment opportunities have traditionally been limited to VC funds or Accredited Investors, as defined by the SEC. Tokenization opens up an entirely new market and business model for potential investors previously excluded from such opportunities.
Tokens can constitute future rights to goods or services, and it permits a whole new methodology of raising capital for enterprise projects or start-ups. It spreads the risk among more users (aka investors), thus creating a favorable investment opportunity and environment. It’s the perfect solution for creating buy-in and support from a future potential user base before launching the actual product or service.
Tokens Include Coded Marketplace Behaviours
Another great benefit of tokenization is the fact that secondary marketplace behaviors can be coded and automated. It can almost resemble a VC investment, but with governance mechanisms that determine the release of funds within specific parameters. Innovative contracts should back all of this.
Such a model’s short-term benefits are that the risk to VC’s is much lower, while the initiative’s founders can have exponentially more committed capital. It could mean long term funding for a start-up that minimizes the need for another round of raising funds when they need it most during development and roll out. Long-term sustainability is a more healthy climate for organic growth.
Tokens Used as New Protocols
Many existing protocols systematize the transfer of data between systems. Then you’ll also find protocols that are deployed explicitly for transferring monetary assets. Tokenization can combine these two existing protocols acting as one standard protocol for value and information sharing.
The benefit of creating and combining such settlements is that it significantly reduces transaction costs and makes faster processing times. Tokens are an excellent solution in a complicated supply chain to collect financial penalties between manufacturers and retailers.
Blockchain technology and tokenization are some of the most innovative and solution-driven technologies available to various markets. It has taken the banking and retail sectors by storm and is a smart investment to consider new start-ups’ longevity.