Tradehill is relaunching its virtual currency trading system after it shut down an earlier version of its offering last year amid regulatory disputes and a legal fight with online payment company Dwolla.

Tradehill's new product, Prime, is a Bitcoin currency exchange for businesses and investors. The company plans an extensive risk and compliance program that includes partnerships with regulated banks, money transfer licenses and automated identity risk technology.

Its makeover is meant to fight Bitcoin's reputation as being vulnerable to hackers. Though the digital currency is designed to be secure, the companies that handle it have endured several security incidents.

"I don't know if there's an unfair assessment of how secure bitcoins are, but I do think it's important to make sure we do our best to ensure our systems are secure," says Michael Sofaer, chief architect of Tradehill.

The company recently received a small infusion of about $400,000 from an undisclosed investor.  Tradehill has also partnered with miiCard, an identity proofing service. Users of the new Prime exchange must verify their identity with miiCard before withdrawing funds from the exchange. Through its relationship with miiCard, Tradehill says it is compliant with anti-money laundering (AML) and know your customer (KYC) regulations.

Bitcoin is designed to be as anonymous as cash. Tradehill's new system maintains that — users remain anonymous to one another — while also demonstrating that it is thoroughly vetting participants.

"We want to make sure a customer that signs up is who he says he is, and isn't up to anything shady," says Sofaer.

MiiCard uses Yodlee's application programming interface to deliver a federated identity that uses bank-level identity protection, such as two-factor authentication and encryption. The technology allows users to prove their identity in a digital format, which can serve as an automated passport for online account openings and other identity checkpoints. MiiCard's integration with Yodlee, a bank technology vendor, enables it to verify more than 350 million identities in ten countries.

Tradehill is also obtaining licensing as a money transmitter land is pursuing relationships with banks to provide FDIC insurance for accounts, Sofaer says. "We're hoping to get up to a line [similar] to what you would have if you were dealing with [a large bank]," he says.

Tradehill was one of the earliest and largest virtual currency trading companies. The company suspending trading in early 2012, and shut down entirely in February 2012. Tradehill sued Dwolla last year, contending Dwolla fraudulently advertised a no-chargeback policy. That case was dismissed in May 2012.

MiiCard says its work with Tradehill will allow it to expand into virtual currency identity management.

Bitcoin is "similar to cash in that it's anonymous, but you still need to trust that the exchange knows who it's doing business with," says James Varga, CEO of miiCard. "The modern virtual currencies like Bitcoin are an exceptional space for us."

Bitcoins have become increasingly popular, but are also controversial—Bitcoin exchanges are frequently hacked, and also suffer from outages and other downtime. In just the past month, Bitfloor halted operations after Capital One closed the exchange's bank account; and Mt. Gox, one of the largest exchanges, was forced to explain outages and web attacks. Coinbase, another exchange, apologized for exposing customer email addresses; and Instawallet shut down because of unauthorized access.

As Bitcoin exchanges partner with more banks, regulatory oversight will likely increase, requiring more robust risk strategies.

"While it's an anonymous marketplace, it's also now an explicitly regulated marketplace, so there has to be some level of 'know your customer,'" says Julie Conroy, research director for Aite Group. "Ultimately it comes down to whether participants have a level of trust in Tradehill to maintain their anonymity."

Risks still remain—there's the question of why someone would need the anonymity in the first place, Conroy says.

"We've certainly seen virtual currencies used for the movement of illicit funds," Conroy says. "While the identity of participants will not be made known to other participants, Tradehill now has the obligation to not only perform KYC, but also submit to regulatory audits and report on suspicious behaviors."

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