Arizona’s measure to create a digital asset reserve explicitly allowing taxpayer-funded investments in Bitcoin and other cryptocurrencies was vetoed by Gov. Katie Hobbs (D) on Friday.

The measure (S.B. 1025), which would have been the first law of its kind in the nation, would have allowed the state treasurer and public retirement systems to invest up to 10% of the money they control in virtual currencies. The veto is the latest setback to Bitcoin advocates, who have yet to persuade policymakers to enact a law in the more than two dozen states considering similar legislation this year.

Backers …