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UPDATE 2-Coinbase wins dismissal of lawsuit claiming it sold tokens illegally

(Adds details from decision, background, case citation)

By Jonathan Stempel

NEW YORK, Feb 1 (Reuters) - A U.S. judge on Wednesday dismissed a proposed class action lawsuit by Coinbase Global Inc customers who accused the cryptocurrency exchange of selling unregistered securities and failing to register as a broker-dealer.

U.S. District Judge Paul Engelmayer in Manhattan said customers who transacted on the Coinbase and Coinbase Pro trading platforms could not show that the company sold or held title to the 79 tokens, a form of digital asset, they traded.

Customers said that unlike platforms that match buyers and sellers, Coinbase acted as an "intermediary," making it the "actual seller" of the tokens.

They said the setup allowed Coinbase to collect transaction fees, while bypassing disclosure rules meant to protect investors in traditional securities.

The judge said Coinbase had no direct role in the transactions, despite having allegedly promoted tokens by describing their "purported value proposition" and participating in "airdrops" of free tokens to boost trading volume.

"These activities of an exchange are of a piece with the marketing efforts, materials and services that courts ... have held insufficient" to qualify defendants as sellers, Engelmayer wrote.

The judge dismissed federal securities law claims with prejudice, meaning they cannot be brought again.

Lawyers for the customers did not respond to requests for comment.

Customers of crypto exchange Binance are appealing another Manhattan judge's dismissal last March of a similar lawsuit.

Scrutiny of the crypto industry has grown in the last year as cryptocurrency prices tumbled and several key participants including Sam Bankman-Fried's FTX exchange and the hedge fund Three Arrows Capital went bankrupt.

Last month, the U.S. Securities and Exchange Commission I(SEC) charged the now-bankrupt lender Genesis Global Capital and the exchange Gemini Trust, run by Cameron and Tyler Winklevoss, with selling unregistered securities.

Coinbase has said it has received SEC investigative subpoenas and information requests concerning its customer programs, including its processes for listing assets.

The dismissed lawsuit sought to block Coinbase from trading tokens without registering as a securities exchange or broker-dealer, and obtain damages for losses and transaction fees.

The case is Underwood et al v Coinbase Global Inc, U.S. District Court, Southern District of New York, No. 21-08353. (Reporting by Jonathan Stempel in New York; Editing by Cynthia Osterman and Bill Berkrot)