Financial regulators must adopt new strategies to keep up with changing technology.

Financial regulation is entering the digital age, converting tools and strategies from analog to digital design. In the next decade, this transformation will reach critical mass and do for regulation what digitization does for everything else—make it better, faster, and cheaper.

Financial institutions and their regulators have always been active technology adopters. Both finance and regulation are already extensively automated. The existing regulatory system, however, essentially takes analog-era processes and information flows—all of which began on paper—and speeds them up with computers. The digital age requires regulators to rethink entirely how they operate.

Analog-era thinking encourages financial regulators and risk managers to assume that data and computing power are scarce and expensive. Regulators must extrapolate from small slices of…

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