NEW YORK (Reuters) - A Florida man accused of engaging in a scheme to sell more than $1 million in bitcoins to users of the illicit online marketplace Silk Road on Tuesday lost a bid to narrow his criminal case.

Robert Faiella, 54, who prosecutors say was an underground exchanger of bitcoins, had urged a New York federal judge to dismiss one of two counts against him, operating an unlicensed money transmitting business, because bitcoins are not money.

But U.S. District Judge Jed Rakoff rejected that argument, saying bitcoins "clearly qualifies as 'money' or 'funds,'" under dictionary definitions, a position supported by legislative history in interpreting the law.

"Bitcoin can be easily purchased in exchange for ordinary currency, acts as a denominator of value, and is used to conduct financial transactions," Rakoff wrote.

The judge also rejected Faiella's arguments that his activities on Silk Road did not constitute "transmitting" money under federal law, saying that in sending customer funds to the website, he transferred the money to others for a profit.

A lawyer for Faiella did not immediately respond to a request for comment. A spokeswoman for Manhattan U.S. Attorney Preet Bharara declined comment.

Faiella and Shrem, 24, face trial on Sept. 22. Shrem, one of the digital currency's most visible promoters, stepped down as vice president of the Bitcoin Foundation, a well-known trade group, soon after his arrest.

Federal authorities shut down Silk Road last year, though a new Internet marketplace under the same name debuted in November. Prosecutors contend that Silk Road enabled used to buy and sell illegal drugs and other illicit goods and services.

Meanwhile, prosecutors from Bharara's office have charged Ross William Ulbricht with operating the site under the name "Dread Pirate Roberts."

He made similar arguments that bitcoin did not constitute money in claiming he was not involved in money laundering. U.S. District Judge Katherine Forrest in Manhattan rejected that contention in July, saying any other reading of the law would "be nonsensical."

The case is U.S. v. Faiella, U.S. District Court, Southern District of New York, No. 14-cr-00243.

(Reporting by Nate Raymond in New York, editing by G Crosse)