What Happens To You If Robinhood Goes Bankrupt

Founded in 2013, Robinhood disrupted the stock brokerage industry by pioneering the commission-free trading model for retail traders. As you already know, millions of traders and investors jumped onboard the Robinhood ship with their financial bows and arrows. But what could happen to all those 13 million users if the trading app goes bankrupt?

If Robinhood goes bankrupt, your assets will be safe and accessible to you. Robinhood is insured by the Security Investment Protection Corp (SIPC) as a requisite for SEC listing. Also, the Federal Deposit Insurance Corporation (FDIC) provides insurance coverage for users in the event that Robinhood goes bankrupt.

As a publicly listed company, the Security Investment Protection Corp (SIPC) obligates Robinhood to safe-keep and insure customer assets. That can help avert the ugly effect of catastrophic losses.

How does Robinhood make money?

About 72% of Robinhood’s revenue in 2020 was generated from Payment for Order Flow. It is a payment received from market makers for providing consumer orders directly to them without going through the stock exchange. The market makers on their part make money from those orders by filling them within the market spread.

For instance, they fill BUY orders at a price slightly below the market ASK price. And then fill ASK orders at a slightly higher price than the BID point. This shrink makes it a win-win for both consumers and the market makers. They then pay a major part of that spread profit to Robinhood as payment for flowing orders toward them.

The rest of its revenue came from interests in customer cash and stocks and other sources of revenue. In 2020, about 8% of the company’s revenue came from Robinhood Gold Subscriptions. It is a subscription that gives users access to instant deposit and level 2 market data.

How does Robinhood insure customer assets?

The commission-free trading app is a member of the Security Investment Protection Corp (SIPC) and is, therefore, insured by the SIPC. The nonprofit organization covers financial service companies in the case of bankruptcy and serious financial challenges.

In the event that Robinhood shuts down, SIPC will cover each customer’s assets up to $500,000. The SIPC covers for your losses with up to $250,000 in cash and $250,000 in assets.

Therefore, except you have assets in the millions invested through Robinhood, you are well covered by the SIPC. How about those millionaires, well immersed in the free trading company proposition.

Alongside SIPC, Robinhood is also insured by the Federal Deposit Insurance Corporation (FDIC). This corporation secures every deposit made on Robinhood and in case of bankruptcy, they cover up to $250,000 in individual losses.

How are your Robinhood assets monitored?

When you deposit money on Robinhood, it is routed to a different account that is not used to run the company. Hence, your money is kept separately from Robinhood’s money. Therefore, whatever happens, your money will not be touched.

The Financial Industry Regulatory Authority (FINRA) makes sure that all financial service companies in the US follow this rule. So, it enforces that companies try to bail themselves with their own money instead of touching customer deposits and assets.

The FINRA is also responsible for penalizing companies that violate this rule and charge them for fraud should the need arise and fine defaulting firms.

How will you get your money if Robinhood shuts down?

On your part, you don’t have to lift a finger. Once a petition is filed with the SIPC that Robinhood is going under, they will spring into action with a court-assigned committee of Trustees.

The Trustees and SIPC will work to acquire court approval and facilitate the release of assets. Once this is done, your money will be returned to you through known means (like ACH, etc.).

Your assets will be valued based on the market’s closing prices on the day that the petition was signed and filed to the court. So, you really do not have to incur any losses. Except you bought the assets at a much higher price than what was closed on that day.

Furthermore, the timeframe for refunding your assets is not fixed. However, the SIPC assures consumers that their assets will be paid for within a reasonable timeframe. So, you don’t have to worry about your money getting tied up in court for years.

Will Robinhood go out of business in 2021?

It’s hard to say that Robinhood will go out of business in 2021. But the foundation on which they stand appears shaky at the moment. In August, the SEC announced that they may ban payment for order flow (PFOF) which accounts for 80% of Robinhood’s revenue currently.

When the SEC made that announcement in August, Robinhood stock fell in the public market. It's because investors worried about the trading app’s ability to survive if its money supply dried up. So far, the payment for order flow is still under review.

Also, big stockbrokers, like Charles Schwab and E*Trade, adopt the commission-free model. They all hang on to PFOF as a revenue stream. A new SEC regulation was passed to regulate the practice.

So, if the PFOF is banned, Robinhood might have a really hard time staying afloat. The chances, however, are pretty slim and they could survive.

What about your crypto assets?

When you buy crypto through Robinhood, it’s not actually owned or held by Robinhood. You can withdraw your crypto assets to a different wallet on-chain or off-chain. So, your crypto assets are held on the appropriate blockchain network instead. This means that bankruptcy will leave you unaffected.

Conclusion

You might wonder what will happen if Robinhood goes bankrupt and how you will get your assets back. Well, that calls for no panic at all. The SIPC insures all the assets held by SEC-listed financial service companies of which Robinhood is one.

Up to $750,000 of your assets is paid back to you by the SIPC and FDIC in the event of bankruptcy.

Nevertheless, like every other company, Robinhood faces a chance of going bankrupt. It is heightened now that the SEC is reviewing and threatening to ban its main source of revenue, the payments for order flow.

Though you will love to see Robinhood’s virtual doors always open and operational. But nothing might go wrong with your assets in the case that your wish doesn’t stay true. In other words, relax and trade responsibly.

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