Robinhood is a retail investment platform that debuted in 2015 and lets anyone who meets the minimum account requirements of age and agreement with their term of service invest in a wide variety of stocks, funds, and now even cryptocurrencies. They do this by taking payment for order flow, but with some very rapid expansion as well as a bit of a rocky experience with some meme stocks, it's not unreasonable for some investors to be asking what would happen if they were to shut down.
If Robinhood were to shut down, the majority of its holdings and all private investments would be transferred to another brokerage. They are a member of the Securities Investor Protection Corporation, and if they become "financially troubled," the SIPC acts as an insurer for your investments.
A large brokerage like Robinhood is highly unlikely to end up going out of business, but if they do, there can be a lot of variables in play that contribute to creating a very complex situation. The reason they go out of business will likely hold a large role in what happens and who would be your broker following the incident, and the number of assets that are in each investor's account will also have an impact on just what happens from there, and if they would get all of their money or assets back.
What Would Happen If Robinhood Shuts Down?
As a participant in the SIPC, if you are an investor on Robinhood, your stocks and ETF shares are automatically protected by the insurance the SIPC provides. This insurance will provide coverage to investors on the platform even if the brokerage ends up losing cash or other assets. The insurance policy covers up to $500,000 per investor, of which a maximum of $250,000 worth of covered cash can be in your brokerage account. While this may not be much solace to those with large retirement funds with Robinhood, the policy is more than enough insurance for the average Robinhood investor.
What Happens To My Money If Robinhood Shuts Down?
Even if Robinhood were to shut down, as highly unlikely and challenging as that would be to actually occur, the SIPC would step in and reimburse the investors affected by the incident. In short, any investment assets that you hold, as well as any cash in your brokerage account, would be insured up to the SIPC maximum of $500,000 total, with a cap of $250,000 that can be covered merely in cash.
Those who use one of the cash management services which Robinhood provides, however, are not technically insured by the SIPC, but this doesn't mean that those investors are going to be left high and dry. All of the cash management products that can be obtained through Robinhood are protected by the Federal Deposit Insurance Corporation, which you likely know as the FDIC from the "FDIC-insured" signage in your local bank. While Robinhood is not itself a bank, they do have a business relationship with many partner banks.
These partner banks are where the cash management products are insured, which means they would be FDIC insured. This means that even if Robinhood were to go out of business or get shut down for any reason, the cash being held in those cash management accounts would be insured by the FDIC up to the maximum of $250,000 per account. Since those banks would not be shutting down, Robinhood would be, your deposits and cash would be safe with them in the unlikely event that Robinhood shuts down.
What Happens To My Crypto If Robinhood Shuts Down?
If you hold any cryptocurrencies on Robinhood, you may have to investigate a little deeper to get some peace of mind concerning the safety of your crypto investments if Robinhood gets shut down. It's important to remember that neither SIPC nor FDIC insurance covers cryptocurrency investments and that Robinhood Crypto is not a member of either SIPC or FINRA.
The Robinhood platform has significant measures in place to help secure your crypto investment, including specialized insurance. Not only are the vast majority of crypto coins held in cold storage, completely offline and unable to be hacked. They also have specialized crime insurance that protects a portion of the crypto assets stored with them, though they don't specifically state how much. The policy is provided by one of the world's leading insurers, Lloyd's, and their broker, Aon.
Robinhood also states that they practice very strict policies outlining their operational security when managing the crypto assets stored with or on their platform. This includes a coin transfer process that must be specifically authorized by a small group of selected individuals. This selection of authorized transfer approval personnel is also rotated constantly, the precise mechanisms of which are not disclosed either publicly or within the company, adding to the security. Robinhood Crypto is registered as a "money services business" with FinCEN, and as a result, is bound to their requirements and laws, including the Bank Secrecy Act.
Is Robinhood Going Out Of Business?
It can be difficult to say with any confidence whether or not Robinhood is going to go out of business in the near future, potentially even more difficult than with many other types of businesses. There are massive protective measures, cash stores, and regulatory restrictions that make it relatively difficult for any large financial entity to go out of business. This difficulty increases with the number of assets that the firm handles, and when there are billions or potentially tens of billions of dollars at stake, it is nearly impossible for the business to go out under.
The Funding Behind Robinhood Is Too Big To Fail
One of Robinhood's main sources of revenue or income is a process called "payment for order flow," which means they act as an investment front-end, accumulating orders from retail investors through their app or website, which other firms pay them for the right to submit to the market. This counts for nearly three-quarters of Robinhood's overall revenue. Their major payment for order flow buyer is a multi-trillion dollar securities firm called Citadel Securities, and even after several hundred billion in losses that Citidel suffered as a result of shorting the GameStop stock, their business didn't skip a beat. This makes Robinhood an incredibly robust investment platform and somewhere that the average person can feel comfortable housing their investment portfolio as well as crypto holdings.
Issues & Setbacks
This isn't to say that Robinhood is without its issues, however, and in 2021 they received a relatively large amount of negative press attention when they suffered what was referred to as "system outages" and for potentially misleading investors. This earned them a fine from FINRA, the Financial Industry Regulatory Authority, in the amount of $70 million. They were also named in nearly one hundred lawsuits surrounding their outages and general handling of the GameStop short squeeze, eventually requiring their CEO, Vlad Tenev, to testify in a congressional hearing.
In perhaps the most potentially damaging development recently, the Securities and Exchange Commission, also known as the SEC, has admitted to considering ending the payment for order flow model that is critical to Robinhood's operations. Even though they make more than 70% of their revenue from payment for order flow, however, removing that may simply force them to charge a fee for each trade in a more conventional stock-trading framework. The SEC has also gone on the record as defining the Robinhood mobile app as having a "casino game" appearance that could be viewed as encouraging more risky investment and trading behavior.
Even with the mountain of bad press that the 2021 meme stock surge brought to Robinhood's doorstep, they still decided to proceed with their initial public offering or IPO, in August of 2021. This means they became a publicly-traded company and that retail investors were free to buy shares of ownership in Robinhood, whether on their native platform or through any other brokerage customers choose. While the stock has seen a relatively steady decline in stock price and has posted significant losses through the rest of the year, simply becoming an exchange-traded company has given them even more ability to withstand any possibility of going out of business.
It Is Important To Understand What Happens To Your Stocks & Cash If Robinhood Shuts Down
Investing in anything carries significant risk, and even when you invest within your personal risk tolerance, there is a slim chance that your brokerage or platform of choice, such as Robinhood, could eventually go out of business or be shut down. This is why it's important to know exactly which of your investments are protected, how they're protected, and the value for which they're insured. Rest assured, if Robinhood were to ever shut down, not only would up to $500,000 of your assets be covered, but any money held in cash management products offered by Robinhood would be safely held by the third-party partner banks, where they would be separately FDIC-insured.
Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.