The main reason for the rejection is that they are not fully convinced that the market cannot be manipulated.
They also need to have guarantees that exchanges can be designed to prevent fraud and other manipulative acts.
The central factor for the Commission in its current consideration of the BZX proposal is whether it is consistent with Exchange Act Section 6(b)(5), 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.
Although BZX argues that its proposal can satisfy these requirements because Bitcoin markets are inherently difficult to manipulate, and because alternative means of identifying fraud and manipulation would be sufficient, the Commission concludes that, as discussed above, BZX has not established that these proffered means of compliancealone or in combinationare sufficient to meet the requirements of Exchange Act Section 6(b)(5).
You can read the full 92-page report here:
https://www.sec.gov/rules/other/2018/34-83723.pdf