I imagine that the registry is optimized for many small values (eg a DWORD - 4 bytes). Most filesystems wouldn't be very efficient with tons of 4 byte files.
Just naively translating the registry into a NTFS directory structure would require 1kb per value, simply because that's the size of a file record (NTFS already has an optimization to store small files directly in the file record if it fits in next to all the attributes and ACLs).
Also the Windows Filesystem driver stack is not very efficient for accessing many small files. It's built for flexibility and security, not speed.
A registryfs would be. The data structures underpinning access would not need to change.
The importance of using a filesystem interface is reuse of the access control mechanisms and filesystem API. It would avoid the type of bug above, due to nesting a hierarchical permissioned structure inside a file.
Also the Windows Filesystem driver stack is not very efficient for accessing many small files. It's built for flexibility and security, not speed.