The thread has to travel back and forth through the eye of the needle quite a bit as the loop around the bobbin is made and the slack taken up as the stitch is tightened. If the needle is too small for the thread, the thread will fray.
Did it ever sew correctly and, if so, what did the stitches look like? They should not show evidence of high tension on the top stitches, which would be evidenced by the appearance of the bobbin thread in the top stitches.
Is this a new thing, or did you just get the machine and are having this problem from the get-go?
I think your machine is threaded correctly, but are there any burrs along the thread path, including between the discs? Is the area between the discs clean?
Is there anything that would increase the tension in the thread, going all the way back to the thread cone? You should be able to set the top thread tension with the tension mechanism with the thread looped twice through the thread guides as you have done.
A properly sized needle should dance down a piece of thread that is held taut at a 45* angle. If it doesn't slide, it is too small. If it slides easily, it is too large. If it is just right then it will sort of wiggle and dance its way down the thread.
The first thing I would try would be a larger needle. I find that different threads of the same size may require slightly different needle sizes.
Here are some shots of my set-up and the needle that I am using with the V-69 that is in the machine.