Hybrid Blockchain-Based Tokenization for Secure and Interoperable Electronic Payment Systems
TL;DR
The findings indicate that the proposed model enhances security, interoperability, and operational efficiency while supporting regulatory compliance and blockchain-based token lifecycle management within real-time payment workflows, while keeping latency-critical authorization and settlement off-chain.
Abstract
The rapid evolution of digital payment technologies has highlighted critical challenges in ensuring data security, transparency, and compliance across centralized tokenization systems. Traditional models such as those used by EMVCo and major card networks rely on Token Service Providers (TSPs) and token vaults, which, while effective at masking Primary Account Numbers (PANs), still suffer from single points of failure, limited auditability, and potential privacy risks. Fully decentralized blockchain-based payment models, on the other hand, often face latency, scalability, and regulatory compliance challenges that hinder real-world adoption. This paper proposes a blockchain-based distributed tokenization model that decentralizes the tokenization and validation phases while maintaining centralized authorization and settlement through existing ISO 8583 payment rails. Unlike traditional centralized tokenization architectures that rely on a central TSP for token management, and fully decentralized approaches that migrate payment processing onto the blockchain, the proposed model selectively decentralizes token lifecycle functions while preserving compatibility with existing payment infrastructure. The model introduces a two-layer architecture: an on-chain layer for token creation, validation, and consumption using smart contracts deployed on the Ethereum network, and an off-chain layer for detokenization, authorization, and regulatory compliance through the issuer-side Token resolution service (TRS) and Token Vault. Experimental results show a 65–70% reduction in gas consumption and lower transaction latency compared to a fully on-chain reference model. These improvements stem from the model’s hybrid structure, which minimizes state changes and optimizes network resource utilization. The findings indicate that the proposed model enhances security, interoperability, and operational efficiency while supporting regulatory compliance and blockchain-based token lifecycle management within real-time payment workflows, while keeping latency-critical authorization and settlement off-chain.