Whether you are a cannabis operator, lender, or investor, you have probably been hearing a lot of buzz about the potential rescheduling of cannabis from Schedule I to Schedule III under the federal Controlled Substances Act, especially following President Trump’s recent executive order directing federal agencies to initiate the process of rescheduling marijuana and reviewing related regulations. It is an exciting development, and there is plenty of reason for optimism, but let’s take a look at what this shift could change (and likely not change) when it comes to banking, lending, and financial services in cannabis.
- The Banking Landscape: Evolution, Not Revolution
It is likely that rescheduling cannabis to Schedule III will not dramatically change what banks are presently required to do under the Bank Secrecy Act (the “BSA”) and the 2014 FinCEN guidance on banking marijuana-related businesses. These BSA-related compliance obligations (i.e., the enhanced due diligence, suspicious activity reporting, and monitoring requirements) will not vanish as a result of rescheduling. Banks will still need to navigate a complex regulatory and compliance environment, and if you are a financial institution already working with cannabis operators or you are a cannabis business already working with a financial institution, your day-to-day relationship will not change.
What the industry is hoping for, however, is that rescheduling will prompt federal regulators to issue amended or entirely new guidance on how banks can engage with the cannabis industry. That kind of updated regulatory framework could open doors to more streamlined processes and potentially reduce some of the friction that has defined cannabis banking for years but more importantly bring in new financial institutions providing banking and lending services to the industry. Eyes should be kept on Treasury and the banking regulators—their next moves will matter once cannabis is rescheduled.
2. Do Not Expect a Rush of New Banks
While it is possible that some new players will dip their toes in the water of cannabis banking, the more likely scenario is that the banks already serving the cannabis industry will remain the dominant players. Why? Because they have already invested heavily in building out the compliance infrastructure necessary to bank cannabis businesses. They have hired the staff, developed the systems, and absorbed the costs—and they are not eager to give up that competitive advantage.
For new entrants, the math could look daunting. With price compression across the cannabis industry, deposits alone may not generate enough revenue to justify the significant compliance obligations that come with banking cannabis. Simply put, the economics may not work for banks that have not already made the investment during the pre-rescheduling regime. That said, we may see new financial institutions adopting cannabis lending programs or expanding their present programs in light of the cash flow savings that are created by eliminating 280E. And more banks entering the space could mean more competition, which would help bring interest rates and other fees down for operators looking to obtain financing.
3. Financial Services Beyond Banking: Where Things May Get Interesting
While the direct impact on banking may be measured, rescheduling could have ripple effects across other financial services that matter to cannabis operations. These include payments, insurance, and even bankruptcy protections. Federal legality (or illegality) plays a significant role in these areas, and rescheduling could start to shift the landscape. For example, cashless payment solutions, in particular, could become more accessible and mainstream. Since cannabis businesses operate in a cash-heavy environment by nature of the current regulatory regime, the ability to accept card payments and digital transactions more easily could provide a meaningful boost to operators bottom line, reducing security costs, improving customer convenience, and streamlining operations.
4. Capital Markets: A Pathway to Uplisting
While under the current regulatory regime, major U.S. exchanges have historically declined to list cannabis companies due to federal illegality. It is likely that a move to Schedule III does not fully resolve that concern but rescheduling could create an eventual pathway to uplisting by normalizing the industry in the eyes of the federal government. As regulators and exchanges grow more comfortable with the shifting of cannabis in a legal landscape, the door to major capital markets may begin to crack open and that is a development worth watching closely.
5. Tax Relief: The 280E Game-Changer
By definition, Section 280E of the Internal Revenue Code (“280E”)—the provision that has prevented cannabis businesses from deducting ordinary business expenses—applies only to businesses trafficking in Schedule I and Schedule II controlled substances. Once cannabis moves to Schedule III, a strict reading of the Code would render that 280E simply cannot apply anymore and Congress would have to affirmatively go in and amend the statutory language to extend 280E to Schedule III substances. As of now, there is no indication that is on the horizon but things may shift as the possibility of rescheduling gets more crystalized.
For cannabis operators, the implications of 280E no longer being a roadblock is potentially transformative. The ability to deduct business expenses such as rent, salaries, and marketing costs could dramatically improve the tax position of cannabis operators and free up capital that has been locked up in inflated tax bills. This could also open up exit strategies for cannabis businesses, investors and shareholders as well as make cannabis businesses more viable to encourage additional lending opportunities from banks and private lenders.
With that said, there also remains concern and cynicism in the industry that if 280E no longer applies to state licensed operators, that new taxes, like sin or excise taxes, may be imposed by federal, state, and/or local governments to recapture some of the lost tax revenue from the absence of 280E. This will be something to watch as cannabis rescheduling develops.
6. Intellectual Property: Start Your Engines
Rescheduling may also open doors at the U.S. Patent and Trademark Office. Historically, federal illegality has complicated efforts to secure the same adequate trademark protection for cannabis brands that are utilized by non-cannabis businesses. A shift to Schedule III could change that calculus, and savvy operators should be preparing now. By getting trademark applications ready for cannabis brands, products, or logos, operators could position themselves at the front of the line to register their marks when the window open.
7. The Bottom Line
Rescheduling cannabis to Schedule III is a meaningful step forward for banking and financial services, but it is not a magic wand. It is likely that banking obligations will persist, most of the industry will remain federally illegal, and opportunity for new financial institutions to enter the market may be limited. But the potential for regulatory evolution, tax relief under Section 280E of the Code, more affordable and expanded access to financial services like payments and insurance, and new intellectual property opportunities may make this a moment, which is worth preparing.
