Tokenization – More than Digitalization

Tokenization is the name for the process by which various types of sensitive data are provided, including those related to payments, such as payment card numbers, but also data related to the identification or authentication, such as identification documents, license numbers, passwords, etc.

It is also possible to tokenize financial assets, such as different types of securities, offering them in the form of tokens on a blockchain.

Tokenization in this sense represents a new form of asset digitalization. It is a much more complex process than digitization, which refers to the transition from the paper form of the document to the electronic one.

Tokens can be created by any internet user, with the possibility of customization, in order to have centralized use. Thanks to tokens, it is possible to materialize the ownership share, certain copyrights or rights to use, as well as other values that can take a digital form.

Transferability

Tokens can be transferred via a peer-to-peer connection, without duplication, and without third-party mediation. This form of asset is very liquid, as it can be sold or bought at any time on the trading platform.

There are various types of tokens, but they can generally be allotted into three groups.

The first group of tokens includes those aimed at increasing security in transactions and information exchange. Such tokens initially serve to enable the process of raising capital without the numerous restrictions that exist on stock exchanges and in the usual forms of financial exchange.

There are also tokens that are used as a means of payment, i.e. those that are used as currencies during transactions. In other words, such tokens serve as a measure of value when swapping.

There are also tokens that can be used so that products or services can be sold in advance. These so-called utility tokens are characterized by the fact that they do not have a stable value, but it varies depending on the level of supply and demand. This leaves the possibility for the token issuer to, in case he/she keeps the portion, increase the assets if their value is increased due to the growth of demand.

Interchangeability

Although in principle any form of the property could be tokenized, there are areas where the process is much simpler than others. These are assets that are easily exchangeable, as well as intangible assets.

With interchangeable resources, there is a possibility of easier conversion of tokens, since it is generally possible to split them into several units, e.g. parts of a certain amount of value.

Intangible assets are easier to token precisely because of their non-existence in physical form, although certain differences in processes and jurisdictions, such as copyright, may make these transfers more difficult.

That is why during tokenization, it is necessary to distinguish how particular rights are transferred, in the sense of whether it is a right to something or real ownership over something.

The essence of tokenization is the expansion of the possibility of exchanging funds between entities without existing constraints, that is, without the need to meet the usual criteria, such as listing on the stock exchange, etc.

In this sense, participants in transactions meet directly, without intermediaries and transaction costs, without geographical and time constraints, and with significantly more liquidity and transparency, which makes real-time audit easier.

* * * * *

This content was brought to you by VISA, the global leader in digital payments, whose mission is to connect the world with an innovative and secure payment network to enable individuals, businesses and economies to grow.

Visa is the general partner of the Fintechlopedia project, an electronic glossary containing all relevant elements of digital transactions and related phenomena, situations, processes, and innovations.