7 bit encoding is a reference to the ASCII character set, which is a set of 128 English alphabet characters and is used to store letters in binary. The set includes all the English lowercase letters, uppercase letters, and numbers from 0 to 9.
The reason for the characters to be encoded to 7-bits, is because early computers handled data in bytes, or 8 bits. The extra bit was originally reserved for error checking.
In this encoding we get 7 digit representations in 0s and 1s for each of the English letters we are trying to transmit.
SendGrid requires 7 bit encoding in our SMTPAPI categories header.
For more information, visit Wikipedia for the entire history of ASCII.