Just today Robinhood released its own banking with 3% annual yield. The money will be SIPC insured. While I understand that SIPC wont cover my investments losing their value, however the cash in the Robinhood saving account should always be insured or not?
Your money is likely not insured as the SIPC said that the accounts they insure are not meant to hold cash strictly for savings.
Cash balances sitting in accounts collecting interest for a long period of time also skirt the SIPC rules on what's covered in the event of a collapse, Harbeck said. It may fall under the category of a loan because the brokerage can take that money and invest it income-generating investments like Treasury securities. A loan wouldn't be covered by the fund.
Until there is a definitive answer from the SIPC I would not expect your money to be safe in a Robinhood checking/savings account.
Obviously the news has fleshed out a little bit but it might be worth simply examining things from a high level.
When you send $100 to your bank, it goes in your bank's balance sheet and the bank issues an IOU for $100. Your bank then lends part of your $100 or does whatever with that money up to the regulatory limits of what it's allowed to do with that money. The $100 isn't really yours at that point, the bank simply owes you $100. FDIC insurance will cover the IOU up to the limits prescribed.
When you send $100 to your securities broker, your broker just holds on to it for you. If you direct your broker to buy 10 shares of ABC, you no longer have $100, you now have 10 shares of ABC. SIPC coverage ensures the you keep your 10 shares of ABC should your broker fail because barring various agreements about your broker's ability to lend your shares etc, they're your shares. Your broker doesn't get to lend your money as a fractional reserve like your bank, it's simply holding on to your $100 for you until you buy a security.
It's not clear what Robinhood thought it was doing here and as is common with Robinhood there's basically no point to reading what Robinhood published about it. It's not clear if Robinhood didn't know SIPC doesn't cover cash (though if you look below I'm not sure how that could be the case). Many brokers have a "sweep" function to push your cash in to a money market because the units of the money market fund are covered by SIPC (though at this point the big brokers also have bank subsidiaries to get your cash covered by FDIC; just Google "cash sweep"). It's very possible that Robinhood's real plan is/was to push your deposits in to a Money Market Fund that has a fee structure allowing it to keep the excess earned beyond 3%. Money market checking accounts aren't unusual, though advertising a guaranteed interest rate probably contravenes an SEC regulation; and the filing paperwork on that mutual fund would likely exist already if that was the plan.
How is my cash protected:
SIPC protects cash in a brokerage firm account from the sale of or for the purchase of securities. Cash held in connection with a commodities trade is not protected by SIPC. Money market mutual funds, often thought of as cash, are protected as securities by SIPC. SIPC protects cash held by the broker for customers in connection with the customers’ purchase or sale of securities whether the cash is in U.S. dollars or denominated in non-U.S. dollar currency.
Personally, I don't think this is vague. Basically, the cash you have in your account because you just sold something or were about to buy something is intra-day protected. If you have to hold cash for some period of time as collateral for something like a commodities trade, which is one of the few reasons to have your securities custodian hold cash for you, is specifically not protected. Money market fund units are specifically protected and clarified as not cash. SIPC specifically does not cover cash that you leave sitting around; and as I mentioned earlier most (all) other brokers/custodians have a cash sweep function so even though you don't realize it your cash is really mutual fund units and SIPC covered.
Further, if you thought that was at all vague there's this gem at the bottom:
Except as specifically provided above [a list of things that ARE securities], the term “security” does not include any
- currency, or
- any commodity or related contract or futures contract, or
- any warrant or right to subscribe to or purchase or sell any of the foregoing.
There is a 250000 $ limit on the guarantees, so if you have more than that, the extra would not be insure.
Also, understand that - as in every bank - the insurance is for bankruptcy of the bank, not for scams. If someone gets your password and transfers the money out, or tricks you into giving it to him, you are not insured - only if Robinhood goes bankrupt.