Transsexuality is usually lumped together with homosexuality and intersex under umbrella LGBTI term, but transsexuality has a number of characteristics that make it very problematic.
You might ask why not just let anyone be who they want to be? Well, we can and we do. The problem is in transitions. Transitions are medical procedures, which have to be regulated to protect patients from malpractice and abuse. And there are quite serious ethical issues with transitions. Essentially, to an uninvolved observer, transition clinics take perfectly healthy bodies on input and produce severely and irreversibly damaged bodies on output.
You might protest that those are transsexuals who benefit from the transitions. But are they really transsexuals? Intersex is obvious and homosexuality can be easily tested, but there's no objective test for transsexuality. Transsexuals as a group tend to be a bit closer to opposite gender in some objective characteristics, but this is far from proving that transsexuality is an objective biological phenomenon. Let me explain.
Nobody is purely male or female. People find themselves somewhere on a spectrum between male and female. Whatever reasonable metric of masculinity and femininity you devise, you end up with double bump distribution that looks somewhat like the one on the illustration below.
You will find extreme masculinity and femininity rare. You will also find truly ambiguous intersex states rare. Nearly all people will be clearly masculine or feminine, but none will be perfectly masculine or feminine. That means you cannot define transsexuality as imperfect gender expression, because then everyone would be transsexual. People subjectively believing to be transsexual will be found in somewhat larger numbers on the slopes between intersex and clear gender, but their distribution will be wide, including a lot of people who are objectively perfectly normal men and women. This follows from the absence of reliable transsexuality test.
In absence of objective test, doctors use purely psychological diagnosis of gender dysphoria. If you look closely at the diagnostic criteria, you will notice that most of them merely measure subjective desire for transition. So people recommended for transitions are those who desire transitions.
The whole idea of purely psychological gender identity detached from physical body is dubious. Nobody was born with irresistible urge to wear skirts. Innate traits and behaviors are very abstract. They can be expressed in a number of ways and it is hard to imagine none of these expressions is compatible with physical body. With flexible expression, individual traits characteristic of opposite gender just move the person a bit on the male-female spectrum without creating a sense of comprehensive gender identity. Gender identity then seems to be just one of many possible subjective conceptualizations of objective personality.
Sure psychologists can insert themselves into the equation and guide patients to better understand themselves, so that subjective perception of transsexuality is more accurate, but given that psychologists have no idea how the mind works and their work is strongly influenced by their worldview, do we really want to trust them with a problem this slippery?
So why not just let people get whatever medical procedure they want without needing diagnosis first? After all, we already allow many useless and health damaging cosmetic surgeries. The first problem is that doctors are supposed to objectively inform and advise their patients. Should they recommend or discourage transitions? Where should they put the threshold? This is what reliable diagnosis is for.
Secondly, patients might be under a lot of social pressure to do the transition in order to have their behavior accepted or to escape bullying. Is it still patient's decision then? Is it in patient's interest or is it just a brutal way to enforce social conformity?
Thirdly, we don't want freedom to mean freedom to walk across a minefield. Safety is an important part of freedom, because it encourages people to actually make use of legally granted freedoms. We don't want people to become afraid of all doctors by allowing Frankenstein doctors to operate.
All of the above is my thinking on the subject and it is the reason why, on personal level, I would never recommend transition to a friend. I would instead recommend making good use of existing freedoms and gender equality to fearlessly express one's gender-nonconforming traits, ignoring all social pushback.
On policy level, governments cannot be required to recognize subjective phenomena. With no clear definition, no theoretical understanding, and no objective test, governments should be free to ignore transsexuality as a possible fad, or worse, medical malpractice. Governments however do have to recognize results of transition, wherever and however it was done. After all, legal documents must describe reality as closely as possible and reality is clearly altered during transition.