President Trump Reschedules Cannabis from Schedule I to Schedule III: What That Means for Financial Institutions

By Robert Baron | CAMS

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‍Executive Summary

On Thursday, December 18th, 2025, President Donald J. Trump formally signed an executive order rescheduling and reclassifying cannabis from Schedule I to Schedule III under federal law. This action represents a historic regulatory milestone and the first formal reclassification of cannabis since the enactment of the Controlled Substances Act in 1970.

For the cannabis industry, the change carries significant implications, including the removal of the Internal Revenue Code Section 280E tax limitation that restricted ordinary business deductions and constrained operating liquidity.

‍For financial institutions, however, the most consequential impact is neither tax-related nor clinical. It is structural.

Since FinCEN issued FIN-2014-G001 in February 2014, financial institutions have been permitted to provide services to cannabis businesses in a manner consistent with their Bank Secrecy Act obligations. The historical barrier was never a matter of legal permissibility; it was the operational cost. Institutions had to absorb the expense of enhanced due diligence, verification, and monitoring required to satisfy the scrutiny of examiners.

Rescheduling cannabis to Schedule III materially changes market participation. Federal posture is clearer, institutional resistance is lower, and more financial institutions are expected to enter the market. As participation expands, cannabis banking shifts from a scarcity-driven niche to a competitive commercial segment.

‍"Elevated fees that previously subsidized manual and inefficient compliance processes become unsustainable."

As competition increases, expectations change. Cannabis banking will increasingly resemble other regulated commercial portfolios where institutions are evaluated on onboarding speed, service reliability, and cost per account. Institutions must screen, verify, and monitor customers at scale using reliable data and near real-time insight. Those that cannot deliver these outcomes efficiently will struggle to compete and may exit the market entirely.

From a regulatory standpoint, core obligations remain unchanged. Financial institutions must continue to demonstrate effective customer due diligence and governance oversight, regardless of the schedule classification. In many cases, increased participation and rapid portfolio growth will heighten examiner focus rather than reduce it.

The practical effect of rescheduling is therefore not regulatory relief, but competitive pressure. 

‍Inefficiency is no longer subsidized.

Cannabis banking matters for reasons far broader than serving an underserved industry. It forces financial institutions to confront fundamental weaknesses in business verification and monitoring that existed long before the consideration of cannabis banking. In this sense, cannabis is a gateway drug, not for consumers, but for bankers. It compels institutions to address longstanding deficiencies in their management of commercial risk.

Institutions that intentionally apply the lessons learned from cannabis banking modernize their broader risk management framework. Those that do not will remain reliant on manual, fragmented, and reactive processes that struggle under competitive pressure.

‍Legal and Regulatory Context

‍The Controlled Substances Act and Schedule I

The Controlled Substances Act created a closed system in which controlled substances are lawful only when manufactured, distributed, and possessed within authorized channels. This maps to banking in two ways:

Under Schedule I, cannabis activity could be lawful under state regimes yet unlawful federally. Institutions relied on risk-based controls aligned with FinCEN guidance. Under Schedule III, cannabis may be eligible for lawful activity within federal pathways, but institutions should expect an adjustment period.

The banking obligation remains to validate what is authorized, what is observed, and whether the funds flow aligns with both. Bankers must evaluate customer activity against expected baselines consistent with the authorized level.

‍FinCEN Guidance (FIN-2014-G001)

FIN-2014-G001 remains operationally crucial because it defines how institutions bank marijuana-related businesses while complying with the Bank Secrecy Act. It emphasizes customer due diligence, understanding the business, monitoring for red flags, and filing SARs based on risk posture.

In examinations, institutions are typically asked to show their cannabis customer inventory, risk rating methodology, due diligence artifacts, and SAR decisioning governance. The question is not whether the institution has a policy, but whether the institution can demonstrate that the program is effective.

The central challenge has always been whether institutions were willing to conduct the enhanced due diligence (EDD) required to demonstrate a defensible risk management program. 

Many institutions declined to enter the market not because they were prohibited, but because they lacked the infrastructure to meet this standard at scale.

‍Operational Lessons: Why Manual Processes Fail

Operating regulated banking programs at scale requires that compliance processes be repeatable, measurable, and defensible. When onboarding or monitoring controls contain even minor weaknesses, those weaknesses become systemic when multiplied across hundreds of customers.

Cannabis banking provided a uniquely concentrated environment to test these principles. The operational question was never whether cannabis could be banked, but whether a higher-risk, cash-intensive portfolio could be managed without collapsing under manual effort.

My experience operating these programs revealed structural weaknesses that plague many commercial banking programs:

• Capacity Constraints: Onboarding required time-intensive validation of licenses and ownership. As volume increased, institutions faced a tradeoff: delay onboarding, weaken controls, or increase pricing.
• Manual Application Processing: Reliance on email and spreadsheets increases error rates and limits management visibility.
• Reliance on Self-Reported Data: Accepting customer data without independent verification creates blind spots in downstream monitoring.
• Reactive Monitoring: Systems that rely on static rules trigger only after issues occur, rather than detecting emerging risks.
• Inconsistent Site Visits: Physical inspections are costly and complex to scale, leading to uneven verification standards.

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This operating model is expensive, slow, and structurally fragile. It survived only because limited participation and elevated pricing masked its weaknesses. As rescheduling expands access, those subsidies disappear.

What Schedule III Changes

Rescheduling cannabis to Schedule III does not fundamentally alter regulatory obligations, but it materially alters the market environment.

Expanded Participation and Competitive Pressure

As participation increases, cannabis banking transitions from a scarcity-driven niche to a competitive commercial segment.

• Customer Choice: Cannabis businesses will compare institutions on onboarding speed, fee structures, and service reliability.
• Lower Resistance: Large banks and regional institutions seeking growth are more likely to enter the market, compressing pricing.
• Execution as a Differentiator: Willingness to bank cannabis is no longer enough. The ability to execute efficiently becomes the primary competitive advantage.

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Operational Consequences

Following rescheduling, the primary operational challenge remains the cost per account. When onboarding requires 45 to 90 days and extensive manual review, margins compress quickly.

"Institutions must deliver the same regulatory outcomes at a lower unit cost without weakening controls."

This requires a shift from episodic compliance to continuous verification supported by reliable data. For example, license verification cannot be a one-time step during onboarding. Institutions must perform event-driven checks when licenses change, locations are added, or ownership is updated.

Institutions that require months to onboard clients will lose business. Manual site visits and outdated collaboration tools will drive operating costs beyond sustainable levels. These failures do not occur gradually; they compound quickly under competitive pressure.

What Does Not Change: The Regulatory Burden

Rescheduling does not reduce examiner scrutiny. In fact, rapid portfolio growth often heightens supervisory focus. The core question remains: Can the institution demonstrate that it understands its customers and consistently manages risk?

Core Banking Obligations That Remain

Examiners will continue to assess the following foundational controls:

• Customer Identification & Verification: Validating legal entities, signers, and operating locations using documentary and non-documentary methods.
• Beneficial Ownership: Identifying and validating individuals who own or control the customer, and updating this information as changes occur.
• Nature and Purpose: Documenting how the company operates, generates revenue, and moves funds.
• Expected Activity Baselines: Establishing profiles tied to transaction monitoring to reflect actual operational complexity.
• Enhanced Due Diligence (EDD): Mandatory deeper analysis for higher-risk customers, including license verification and regulatory history.
• Ongoing Monitoring: Continuous, risk-based monitoring to identify deviations and investigate anomalies.
• Suspicious Activity Reporting (SARs): Identifying and reporting suspicious activity with clear narratives and documented rationale.
• Governance and Oversight: Active board oversight, independent testing, and clear escalation pathways.

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Schedule III intensifies the need to execute these obligations efficiently. Those who cannot reconcile the tension between cost, speed, and control will struggle to sustain their programs.

Cannabis as the Banker's Gateway Drug

Cannabis banking serves as a forcing function for institutional change. It compels financial institutions to confront longstanding weaknesses in business verification and monitoring that predate cannabis banking itself.

Cash intensity, layered regulatory requirements, and rapid business evolution compress the margin for error. Control failures that might remain hidden in other portfolios become immediately visible here.

• Manual onboarding cannot scale.
• Self-reported information lacks reliability.
• Periodic reviews fall behind operational reality.

For institutions that respond deliberately, cannabis becomes a catalyst. Sustainable programs require modernization: structured onboarding, automated verification, and proactive risk identification.

The value of this transformation extends far beyond the cannabis industry. The capabilities required to bank cannabis effectively, including but not limited to, real-time verification, data integration, and continuous monitoring, are directly applicable to Money Services Businesses (MSBs), gaming, fintech partnerships, and other complex sectors.

Cannabis is not the risk. Inefficiency is. Cannabis simply removes the ability to ignore it.

Conclusion

Financial institutions could always bank cannabis. What has changed is not permission, but pressure.

Rescheduling to Schedule III eliminates the scarcity economics that previously allowed manual, expensive, and fragmented compliance models to survive. Institutions must now deliver the same regulatory outcomes with fewer resources per account.

In this environment, execution determines viability. Institutions that can efficiently screen, verify, and monitor commercial clients using reliable data and structured workflows will be better positioned to compete and grow; those who cannot will find their margins compressed beyond sustainability.

About the Author

Robert Baron is a commercial banker and Certified Anti-Money Laundering Specialist (CAMS) with over 20 years of experience in designing and operating BSA/AML programs including building, managing, and advising multiple cannabis banking programs across the United States.

Mr. Baron is the author of Confessions of a Cannabis Banker (High Times, 2021) and a leader in developing verification and audit readiness technologies for financial institutions. His work focuses on helping institutions scale compliance programs without sacrificing control or defensibility.

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