Reuters/Bobby Yip
Attendants pose with a bitcoin sign during the opening of Hong Kong's first bitcoin retail store.
The cryptocurrency is down 0.7% at $1,033 a coin. It was as high as $1,066 earlier on Tuesday.
The regulator cited the fact that bitcoin is traded on unregulated markets, which means the SEC wouldn't be able to prevent fraud or market manipulation.
In its ruling the SEC said:
"As discussed further below, the Commission is disapproving this proposed rule change because it does not find the proposal to be consistent with Section 6(b)(5) of the Exchange Act, which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest. The Commission believes that, in order to meet this standard, an exchange that lists and trades shares of commodity-trust exchange-traded products ("ETPs") must, in addition to other applicable requirements, satisfy two requirements that are dispositive in this matter. First, the exchange must have surveillance-sharing agreements with significant markets for trading the underlying commodity or derivatives on that commodity. And second, those markets must be regulated.
Based on the record before it, the Commission believes that the significant markets for bitcoin are unregulated. Therefore, as the Exchange has not entered into, and would currently be unable to enter into, the type of surveillance-sharing agreement that has been in place with respect to all previously approved commodity-trust ETPs-agreements that help address concerns about the potential for fraudulent or manipulative acts and practices in this market-the Commission does not find the proposed rule change to be consistent with the Exchange Act."
Tuesday's announcement follows a similar ruling that was reached on March 10, when the SEC said it had rejected the Winklevoss twins' bitcoin ETF.
2017 has been a volatile year for bitcoin.
The cryptocurrency gained 20% in the first week of the year, but soon crashed 35% after reports surfaced that China was going to crack down on trading. First, China's biggest exchanges started charging a flat fee of 0.2% per transaction, then they announced they were blocking customer withdrawals.
But bitcoin continued to climb higher, putting in a peak of $1,327 a coin shortly before the SEC rejected the Winklevoss ETF.
Since then, however, bitcoin has tumbled more than 20% following reports developers were threatening a "hard fork" that would split the currency in two.
Bitcoin has been the top-performing currency every year since 2010, aside from 2014.
A third SEC ruling on a bitcoin ETF, by Grayscale Investments, is also expected to be rejected; although the timing of a final decision is not yet known.
Get the latest Bitcoin price here.