Before there was Bitcoin, there was Ven, a digital currency that launched six years ago as part of the Hub Culture social network.

All its life, Ven has been a closed currency — it can be spent, but it can't be exchanged for dollars or other currencies. But that's all about to change, as Ven prepares its launch on Kraken, a new San Francisco, Calif.-based exchange run by Payward Inc.

"Hub Culture has teamed up with Kraken to provide limited exchange for Ven for customers who pass their stringent identity and membership requirements," says Stan Stalnaker, founding director of Hub Culture. Ven will initially trade with other virtual currencies before trading with dollars and euros.

Payward will be using Jumio Inc.'s recently launched face-match technology, which provides security by comparing a consumer's ID photo the consumer's face. Both the ID photo and the shopper are examined in short video clips taken by a smartphone or PC webcam.

Kraken, which launched about two weeks ago, allows consumers to trade common currencies such as U.S. dollars and euros, as well as virtual currencies such as Bitcoin, Ripple, Litecoin and Namecoin, says Jesse Powell, CEO of Payward.

Payward recently spoke to PaymentsSource about the fickleness of banks' relationships with virtual-currency companies . To hedge against the risk of banks suddenly closing accounts, some Bitcoin exchanges have started forging partnerships with multiple financial institutions, but Powell said that's a "temporary treatment for a symptom."

Instead Payward has been quietly tweaking its platform over the past several months, and is working through the regulatory framework it needs, says Powell.  The exchange is not "operating where we would need a license to operate," says Powell.

Payward has not obtained any state money transmitter licenses. Instead it is fully operational in the three states—South Carolina, Montana and New Mexico—that don't require licenses. It is also partially operational  (trading only virtual currencies) in states that don't specify virtual-currency trading in their regulations, Powell says. There are about 15 states where Kraken cannot operate at all, he says.

Most of Kraken's users are in Europe, Powell says.

By participating in an exchange, Ven will become more liquid, Stalnaker says.

"Over time the scope has grown and expanded, so that it's not only available for activity within the network, but within larger financial markets as well," says Stalnaker. "This is due to its evolution into a global asset-backed currency oriented around stability."

Users in the Hub Culture social network are ranked according to their activity. In the future, Hub Culture will create an Identity Core, which will allow members to improve their trust levels with other members by sharing information such as links to their other social media profiles, says Stalnaker.

"This is fundamentally different to the anonymity hallmarks of Bitcoin, but that's okay—the two currencies have very different roles in the global marketplace," says Stalnaker.

Hub Culture does not currently provide a way for Ven users to cash out. This closed-loop system allows the company to work outside of the regulation coming down on Bitcoin businesses, which are categorized as money services business by the Financial Crimes Enforcement Network's virtual currency guidance.

Stalnaker sees the growing digital currency market as an avenue for growth.

Hub Culture is currently speaking with banks and other money services businesses about how financial institutions can use Ven.

"To expand liquidity for Ven, Hub Culture is working with regulated money services partners and exchanges to build cash-out functions … under regulated oversight," says Stalnaker. Hub Culture is also adding technology to improve security, a move that will further Ven's potential uses.

"The Bitcoin and dollar are both volatile," says Powell. "Ven is interesting in that it sort of ties to a basket of currencies."

Since Ven can be purchased with a credit card, it could be used to as a first step in obtaining any virtual currency.

"Ven is not trying to be a competitor with Bitcoin," says Powell. Ven "has more appeal to institutional investors and larger companies…that want to avoid the currency risk of having a lot of real currency sitting around."

Kraken will also soon accept and trade another virtual currency, Ripple.

Ripple is the digital currency of a larger currency-agnostic payments platform, started by OpenCoin Inc., which is headed by financial services entrepreneur Chris Larsen. In 2006, Larsen launched Prosper, an eBay-style marketplace for peer-to-peer loans. Larsen is using the lessons he learned about regulation as part of Prosper and adapting them to the virtual currency venture. 

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