Nadella suggested that, as facial recognition becomes increasingly prevalent, self-regulation among tech companies might not be enough to deal with the societal challenges it represents.
"One of the things that I feel today is, in the marketplace, there's competition; there's no discrimination between the right use and the wrong use of facial recognition," Nadella told an audience at the World Economic Forum in Davos.
He said that, while self-regulation is important to ensure use of facial recognition is "fair and robust," government rules may be needed to prevent harmful consequences.
"At the same time we also welcome any regulation that helps the marketplace not be a race to the bottom," Nadella said.
Such a "race to the bottom" could in fact lead to "even more heavy-handed regulatory regimes," he added.
The software giant has been at the forefront of raising concerns about the potential misuse of facial recognition. It has been increasingly calling for rules to be established to prevent human rights violations and discrimination.
The technology is included in many new smartphones including Apple's new iPhone models and Samsung's latest Galaxy phones. A primary purpose of facial recognition so far has been to identify users with biometric authentication to bolster the security of devices.
But growing worries over the ability of countries like China to use it to spy on citizens have led to increasing calls for regulatory oversight.