Glossary

Tokenization: what is it, and how does it impact financial services?

Q: What is the difference between tokenization and cryptography?

Encryption "scrambles" the data and can be reversed with the correct key. Tokenization, on the other hand, completely replaces sensitive data with a code that has no logical connection to the original information.

Published on Jul 20 2023. 24 minutes reading

Tokenization: what is it, and how does it impact financial services?

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The process of digitalizing data using blockchain technology, which was the technology that made it possible to create cryptocurrencies, is causing another revolution: tokenization.

With this innovation, multi-asset markets become more accessible, integrated, and extremely secure, allowing for the massive entry of new investors. Furthermore, in a context of high circulation of personal and financial data, security becomes a priority in all sectors, especially the financial sector.

The expected impact of negotiating tokens is immense. According to an estimate by MarketsandMarkets, asset tokenization will be responsible for expanding the market from US$ 2,3 billion in 2021, to US$ 5,6 billion by 2026.

On the other hand, tokenization is also a key factor in data protection in an increasingly digital world.

In this article, we will discuss what tokenization is and how it works, as well as explore in more detail its applications and its impact on financial services.

The tokenization process consists of transformation of an asset or data into a token. In others, it is the process of transforming an asset or data into a digital representation of it, which contains its essential information.

What can be tokenized?

It is possible to tokenize data, assets, and transactions, and this, in fact, defines the different types of tokenization: protection of personal data (such as CPF, email or bank details); financial transactions (payments by card or via apps); and asset representation (such as real estate, agricultural crops, or works of art).

Asset tokenization

Any asset or right that has financial value can be converted into a type of “symbol” or “token”, called a token.

Tokenization is the process of digitally representing an asset, whether it is originally digital or tangible. A token can represent the entire asset or just a fraction of the original asset.

Once an asset is tokenized, its "file" is public and verifiable. From that moment on, it is no longer possible to make any changes or trades on the tokenized asset without proper registration. This transparency provides excellent anti-theft security.fraude.

Data tokenization

McKinsey’s data tokenization consists of a technique that replaces sensitive data—such as CPF or card numbers—with tokens to protect them. In this case, randomly generated codes made up of letters, symbols, and numbers have no value outside the secure context in which they were generated.

Thus, if an attacker manages to access the environment, he will not have access to the real data, but to a random and indecipherable code.

What are tokens?

These are digital representations of an asset or piece of data. In the first case, the token is a virtual record containing all the essential information about the asset or product, used to facilitate its digital management and trading.

In the case of data, the token is, as we mentioned, a code created in the tokenization process that will be used to replace real information and prevent unwanted access to it.

How does tokenization work?

Tokenizing assets is like issuing shares of an asset, property, or right. The asset is tokenized using end-to-end encryption integrated with technology. blockchain.

The programming language that registers the token is where the asset’s characteristics, the rules for identifying its owners, and the ways the asset can be traded in smart contracts are defined.

Tokens can be classified as fungible or non-fungible (NFTs, or non-fungible tokens), depending on the asset they represent:

Fungible token: the asset represented may be replaced by another of the same type, quality and quantity.
Non-fungible token (NFT): In general, the asset represented has an exclusive characteristic, with no direct equivalence with another asset.

The simplest examples of NFTs are those associated with works of art. After all, a Picasso painting cannot be replaced by a Van Gogh painting, and vice versa. In other words, tokens representing these assets, while both correspond to highly valuable works of art, are not direct or equivalent substitutes.

What is tokenization for?

By converting data into a non-confidential digital substitute linked to the original – the token – the main purpose of tokenization is protect confidential information.

For example, when you make an online purchase and provide your card number, instead of transmitting and storing the actual number, the security system generates a token that specifically represents your card for the transaction. While the token is used for the transaction, the original data remains secure in the "token vault”, a kind of digital safe.

Tokenization and data protection

Card payments, Pix e digital wallets are already part of the daily lives of those who live in an increasingly “cashless” or no money. And all this financial digitalization requires a very large exchange of data in the virtual environment.

However, personal documents, banking or card information are considered sensitive data and need to be protected – especially in a context of greater sophistication of fraudyou adore

Tokenization is a key player amid the high circulation of personal and financial data. As an effective technology for ensuring the security and privacy of sensitive information, it guarantees the digital reliability of these processes, making the environment in which we live and transact more secure.

Tokenization for regulatory compliance

Another purpose of tokenization is to help companies comply with industry standards and regulatory compliance requirements, such as the LGPD (Brazilian General Data Protection Law). To comply with data privacy rules, for example, organizations choose to transform this information into tokens.

Tokenization vs. Encryption

It is important to know that Tokenization and encryption are different technologies. A Encryption Scrambles data using complex mathematical formulas and algorithms that must be deciphered with the correct key. If that key is discovered, it's possible to reverse-engineer it to access the original data.

A tokenization, on the other hand, completely replaces sensitive data with code that bears no logical relationship to the original information. In other words, even if intercepted, the token will not be useful outside the secure system that created it.

Tokenization in different sectors

Since any asset with economic value and tradability can be tokenized, it's reasonable to assume that it's only a matter of time before tokenization becomes widespread. At the same time, tokenized assets open up possibilities for the emergence of new business models.

Some of the most common examples of sectors that can use tokenization include the real estate market, securities market (such as stocks and bonds), art and collectible works market, precious metals market, commodities market, etc.

In addition to traditional markets, asset tokenization also creates new opportunities for investments, such as negotiating rights to the future earnings of artists or athletes, for example.

In cases like this, the professional involved benefits from the possibility of “advancing” their income to the present time, and thus being able to invest in new training and materials, for example, contributing to their future success.

Specific types of tokens

Our digital paymentsThere are different types of tokens, each created to meet specific security and operational needs.

Network tokens: Generated by the card networks themselves, they replace the actual card number in recurring or digital transactions. They work across multiple establishments and channels, offering a high level of security and a higher approval rate.
Gateway tokens: created by payment intermediaries, such as gateways and acquirersIn this model, the physical card is securely stored by the provider, and the merchant only uses the token, reducing their exposure to sensitive data.
Device tokens: Linked to a specific device, such as a smartphone or smartwatch, and widely used in digital wallets (Apple Pay, Google Pay). They ensure that payment can only be made from that authorized device.

Token lifecycle

The lifecycle of a token begins with the issue, When the actual card data is securely sent to the tokenization provider, which generates the corresponding token. Then, the process occurs. storage, Made in protected environments, whether in the gateway system, the card network, or the digital wallet.

During the use in transactions, The token replaces the card number in each payment, being validated by ecosystem participants such as acquirers, card networks, and issuing banks. Over time, the token may undergo changes. updates, For example, when the physical card is renewed or replaced.

Finally, the token can be expired or revoked, Whether at the customer's request, due to account closure, device change, or for security reasons, its use in new transactions is automatically interrupted.

Detailed steps of the tokenized payment process.

The flow of a tokenized payment begins when the customer chooses to pay and authorizes the transaction. Instead of the actual card number, the tokenized card is used. token is sent to the retailer or app.

This token goes to the payment gatewaywhich forwards the transaction to the acquiring bank and the card network. The card network identifies the token and performs the... secure conversion for the actual card details, which are sent to the issuing bank.

The bank evaluates the transaction, verifies the balance, limit, and risk, and returns the... authorization or refusal. A respostThe card travels the reverse route to the merchant, completing the payment without the sensitive card details being exposed.postthe.

Step-by-step guide to creating a token.

The process of creating a token starts with card data collection, made in a secure environment, such as the merchant's checkout or a digital wallet.

Digitization > Authentication > Token Creation > Activation > Usage

This data is then sent in encrypted form to the tokenization provider, which can be a brand, a gateway, or a digital wallet. The provider validates the information. It works with the issuing bank and generates a unique token, which replaces the card number.

Finally, the token is securely stored and used in future transactions, enabling faster, more secure payments with less risk. fraude.

The Central Bank and tokenization in Brazil

In Brazil, the Central Bank has invested in initiatives aimed at advancing tokenization and modernizing financial infrastructure.

One of the main projects in this regard was the Digital Real/drex that, after almost two years of testing, It is no longer being treated as a future official digital currency. (CBDC) to establish itself as a broad laboratory for technological innovation.

In November 2025, the Central Bank announced that it would not proceed with the implementation of Drex as a digital currency issued directly by the monetary authority. The assessment was that, in the formats initially studied, the creation of a CBDC would not be the most efficient way to generate concrete benefits for the economy.

Instead, the focus shifted to developing an infrastructure capable of supporting smart contracts with automatic financial settlement., linking payments to compliance with predefined rules.

With this change of course, the Central Bank shifted the debate from "currency itself" to the functioning of the system that supports digital transactions.

Nevertheless, Drex's legacy remains relevant: The project contributed to maturing discussions on asset tokenization, smart contracts, and the efficiency of the financial system.

As previously stated publicly by the then-president of the Central Bank, Roberto Campos Neto, tokenization continues as a structural trend, with the potential to make the financial system more competitive, integrated, and driven by digital assets, with less dependence on traditional accounts and greater prominence given to tokens.

Regulation is the biggest challenge facing asset tokenization today.

The biggest current obstacle to tokenization, not only in Brazil but worldwide, is the deficient legal framework needed to regulate its operations. There is a legislative gap to be filled regarding cryptoassets: a lack of regulatory definition and the appointment of competent bodies to oversee them.

Until the challenge of regulation is overcome, tokenization initiatives might not advance, depending on the business model of the traded asset and its respective regulator.

However, once this difficulty is resolved, tokenization will lead to an explosion of new opportunities, mainly in the capital markets, in which it will be possible to tokenize companies, receivables, and securities.

In addition, the traditional market as we know it could be entirely transformed due to the agility, automation, decentralization, and transparency that blockchain technology provides.

The Regulatory Sandbox in Brazil

One of the actions created to help overcome the difficulty of creating appropriate regulations for operations involving tokens is the so-called “Regulatory Sandbox”, organized by the Brazilian Securities and Exchange Commission (CVM).

The Sandbox functions as a testing environment monitored by the CVM, in which previously authorized participants receive temporary permission to develop innovations in regulated activities.

In the Sandbox, the CVM, in collaboration with some of its regulated entities, closely observes what initiatives need to be taken to improve the regulatory framework of transactions involving tokens.

Tokenization in the sector banking and payments

The transition from using physical currency to digital currencies have been progressive and consistent in recent years around the world. Even in regions such as Latin America, where cash is still the most widely used means of payment, digital initiatives such as Pix have found surprising adherence.

This transition to digital currencies tends to accelerate with the tokenization of assets. Cryptocurrencies, in parallel with the advancement of Open Finance, will be increasingly used in token trading. Over time, it is also expected that tokens themselves will become used as a means of payment, in a sort of "modern barter."

What are the benefits of tokenization for the payment methods market?

Currently, the tokenization method is already being used in the segment of payment methods To bring greater security to digital payment processing, keeping sensitive user information confidential. This is an even more efficient method than common encryption as a barrier in... antifraud solutions.

Some of the benefits brought to the banking and payments sector by tokenization include the following:

Reduced use of physical currency, resulting in savings for countries;
Greater security in financial transactions;
Faster and simpler settlement;
Reduced brokerage costs;
Greater efficiency through the use of smart contracts.).

In addition, new products and financial services tend to arise from the consolidation of asset tokenization, promoting the expansion of the potential for raising funds, especially for small and medium-sized companies, as well as financial inclusion of the still-unbanked population, especially in scenarios such as that of Latin America.

Today, for example, banks are already exploring the issuance of debt in blockchain structures in Europe. Tokenization is also expected to reduce currency exchange fees for transactions in which funds move between countries.

Tokenization brings numerous advantages to society and financial services

Tokenization is the subject of the day all over the world, not only because it is a transformation that is currently under way, but also because it brings with it countless advantages. Democratizing access to investments in various segments is one of those advantages. With tokens, fractions of an asset can be traded, which allows investors with less purchasing power to have access to markets whose entry cost would be too high without tokens.

Another benefit is diversification of investment portfolios, because investors with very different profiles can have more asset options in which to invest their funds. By increasing the range of alternatives, the total risk of the portfolio tends to fall.

In the payment and financial services market, tokenization leads to expanded financial education content, as the population has more incentive to learn about new market segments and financial services that were inaccessible before.

Furthermore, we will have faster, safer, and more transparent transactions, as tokenization combined with blockchain keeps transaction data secure, which further facilitates and drives the use of the virtual environment for financial services.

Finally, we can cite the lower costs, because since we are talking about digital records in smart contracts, all settlement and back office services are simplified. This tends to reduce operating costs significantly, ensuring that those involved pay lower fees.

Risks and challenges of tokenization

Despite its numerous benefits, tokenization also presents significant challenges. One of the main ones is the dependence on technology providers., such as flags, gateways, or blockchain platforms, which requires Strict criteria in the selection of these partners.

At the same time, the complexity of integration with legacy systems This may require significant technical and operational investments.

Another critical point is key and access management, especially in blockchain-based environments, where control failures can result in irreversible losses. It's also important to mention risks such as... fraudMore sophisticated technologies, regulatory challenges that are still evolving, and issues related to data privacy and governance.

Therefore, the adoption of tokenization must be accompanied by continuous monitoring, robust security policies, and regulatory compliance.

Tokenization API

A tokenization API is the interface that It allows the integration of systems from companies, banks, or fintechs with tokenization services. in an automated and secure way.

Through this system, applications can send sensitive data, such as card information or personal data, to a specialized provider, which generates and returns a token for use in transactions, reducing exposure to critical information.

In practice, the API acts as a The link between the company's environment and its financial infrastructure. Its function is to receive the data in encrypted form, perform the necessary validations with issuers, card brands, and other participants in the ecosystem, and return the token that is then used in transactions.

This type of structure enables, for example, solutions offered by players such as... Dock, which provide robust APIs for payments, card issuance, and financial services, allowing tokenization to be incorporated in a scalable and secure way, in accordance with the regulatory requirements of the Brazilian market.

Dock: tokenization for payment cards

A Dock, a leader in technology for financial services in Latin America, offers a complete tokenization solution For card issuers, digital wallets, and businesses that want to operate payments in a secure and scalable way.

The technology was developed to serve everyone from large banks to fintechs seeking speed, compliance, and trust in their payment methods.

Dock Token Service Provider

A provider approved and authorized by major card brands and wallets, offering secure and reliable tokenization solutions for your business.

Among the main features, the following stand out:

Protection of sensitive data based on international safety standards, such as PCI DSS and EMVCo standards, which ensure regulatory adherence and robustness against leaks;
Direct integration with market-leading digital wallets, such as Google Pay, Apple Pay and Samsung Pay, enabling seamless payment experiences and omnichannel for end customers;
Generation of dynamic tokens, linked to specific devices, applications or channels, ensuring that tokens can only be used in authorized contexts, reducing the possibility of fraudare;
Complete management of token lifecycle, with issuance, automatic update (e.g. in case of card renewal) and secure revocation features, which allows respostrespond quickly to incidents without compromising the customer experience.

The infrastructure of Dock It also offers scalability, real-time monitoring, and API integration, facilitating adoption by companies and ensuring consistent performance. With this solution, our customers have seen an increase in transaction authorization rates and a significant reduction in transaction failure rates. chargeback and improved perception of security by end users.

Want to bring more security and efficiency to your digital payments? Talk to us. Dock Discover how tokenization can transform your customers' experience and your business performance.

FAQ: Main questions about tokenization

What is payment tokenization?

It involves replacing real payment data, such as card numbers, with a digital token that has no value outside of a secure environment, reducing the risk of exposing sensitive information during transactions.

What is the difference between tokenization and cryptography?

Cryptography "scrambles" the data and can be reversed with the correct key. Tokenization, on the other hand, completely replaces sensitive data with a code that has no logical connection to the original information.

How does credit card tokenization work?

Card data is securely sent to a tokenization provider, which generates a unique token to represent that card. This token is then used in transactions, while the actual data remains protected in a digital vault.

Is tokenization secure? What are the benefits?

Yes, tokenization significantly increases security by preventing the transmission and storage of sensitive data. Among the main benefits are a reduction in... fraudYes, greater consumer confidence and better approval rates.

What are the benefits of tokenization for companies?

Companies reduce the risk of data breaches and simplify compliance with regulatory standards, such as the LGPD (Brazilian General Data Protection Law) and PCI DSS. Furthermore, they gain operational efficiency and lower costs through data prevention. fraudeg.

How to implement payment tokenization?

The implementation is done through integration with APIs from specialized providers. These APIs allow for the secure and scalable creation, storage, and management of tokens.

What are payment tokens and how do they work?

Payment tokens are digital codes that represent real data from a payment method, and are validated by the financial ecosystem during each transaction.

Does tokenization help with PCI DSS compliance?

Yes, by reducing the use and storage of sensitive data, tokenization lowers the scope of PCI DSS compliance. This simplifies audits and reduces regulatory risks.

What types of data can be tokenized?

Personal data, such as CPF (Brazilian taxpayer ID) and email, financial information, such as cards and accounts, and also economic assets, such as real estate or securities, can be tokenized.

What is a Token Service Provider (TSP)?

It is the entity responsible for generating, managing, and validating payment tokens; in other words, it operates the tokenization infrastructure.

Tokenization: what you saw in this article

Tokenization is the procedure for digital representation of an asset using blockchain technology.
A token is registered in a programming language in which the asset’s characteristics, the rules for identifying its owners, and the ways that asset can be traded in smart contracts are defined.
A token may represent the whole asset, or just a fraction of it. The represented asset may be fungible —it can be replaced with another of the same type, value, or quality— or not fungible (known as an NFT), which is the case of exclusive assets, such as works of art.
Any asset that has economic value and can be traded can be tokenized, such as: real property, works of art, precious metals, commodities, collectible objects, copyrights, etc.
In the banking and payments market, tokens decrease the cost of transactions, increase the security of confidential information, and improve competitiveness of the sector.
The greatest obstacle to tokenization worldwide is the development of an adequate regulatory framework. The Brazilian Regulatory Sandbox, monitored by the CVM, is an important initiative by the regulator to find solutions to this challenge.
Once the regulatory issue has been overcome, tokenization may be expanded in various segments, especially in financial services and products.
Tokenization encourages the democratization of investments, allows safer and more transparent transactions, reduces risks, costs, and the bureaucracy of middlemen’s back office services.