FDIC vs SIPC on Robinhood

Question

I'm really confused how Robinhood insures cash. I am NOT talking about the cash management bank sweep program, where the money is insured by the banks....that is quite trivial.

I'm talking about when you deposit money to Robinhood instant account. Stocks are protected with SIPC. But money are insured with what? FDIC is not possible because only banks can do it, but Robinhood is not a bank, but a brokerage firm.

Am I correct to assume that when you keep cash on Robinhood Instant (not cash management), then there is absolutely NO insurance???

Answer 1

SIPC also protects cash, not just securities. Your cash is still insured.

From https://www.sipc.org/for-investors/what-sipc-protects

SIPC protects against the loss of cash and securities – such as stocks and bonds – held by a customer at a financially-troubled SIPC-member brokerage firm. The limit of SIPC protection is $500,000, which includes a $250,000 limit for cash.

Answer 2

FDIC and SIPC are different types of insurance that cover different things.

FDIC insures cash in a bank account. With an FDIC-insured bank account, if you put $1000 into your account, you are guaranteed to get $1000 out (not including bank fees).

The “cash” you have in a brokerage account such as Robinhood, however, is not in a bank account. Instead, it is invested in a money market fund. A money market fund is a mutual fund that invests in high-quality short-term debt. It is considered very safe and very liquid, and many people consider it as safe as a bank account. However, it is possible for a money market fund to lose value. This happened to some money market funds in 2008.

SIPC does not cover investment losses, so if the money market fund that your brokerage uses loses value, it will not be guaranteed by the government. What SIPC does cover, however, is bankruptcy or misdeeds done by your brokerage.

To answer your question, the “cash” you have in your Robinhood account is insured against Robinhood doing something wrong, but it is not insured against an investment loss of the money market fund. It is possible (though not likely) to lose money in your account.

Answer 3

Correct, Robinhood isn't a bank. It moves cash into FDIC insured program banks that hold and invest your cash. That means $250k of FDIC insurance.

Any cash that is in your brokerage account will be covered by SIPC.

However, you shouldn't take my word for it. Contact Robinhood and ask them for details about their cash management program as well as the names of the program banks.