Concept
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The first phase of any sort of regulation depends on the identification of specific and necessary changes that the regulation seeks to address. It does not simply start with the assumption that regulations are needed. Instead, it is a response to undesirable market conditions or activities. The creation, formulation, implementation and monitoring of regulation is costly in terms of money and time. Therefore, before parties attempt to create regulation there must be an identified need that the regulation seeks to address. This need must also be significant enough to warrant change.
During the identification phase, the regulatory party experiences the need in terms of significant discomfort under the status quo. This can take a multitude of forms on the different market levels, but from a high-level view, the discomfort usually comes from either:
Obstacles in the market that prevent a desired outcome. For example, excessive legal requirements for starting a business and outdated technology that holds back an industry (think about the introduction of cryptocurrencies to the markets).
Activities in the market that prevent a desired outcome. For example, discrimination of investors due to non-financial variables, such as race or ethnicity.
Once this need is large enough or presents a significant challenge, the identification phase draws to a close and gives way to the next phase, in which the person, organization, community or state which has brought the issue forward for change is known as the initiator.