Do you really own anything, or are you just lending money to Robinhood? Does your fractional buy get reported to the transfer agent for the stock? Do you get the annual report? Voting rights?
Most retail investors don’t want an annual report or voting rights, nor do they mind if they own the share if the asset they buy tracks it sufficiently well.
It's still necessary information to know, regardless of what retail investors want. If they were up front about it, it wouldn't matter, but they don't seem to be.
Or perhaps more importantly, if Robinhood fails do you actually get to keep the shares like with a traditional broker or do "your" fractional shares disappear with the company?
Doesn't that rely on you being the actual owner of the shares? If your shares only exist in Robinhood's database, I don't think SIPC would apply.
EDIT: After some Googling it appears that SIPC does protect securities that weren't actually purchased due to fraud or mismanagement. IANAL so I don't know if that would apply to this specific situation, but they have protected other non-owners before like in the case of Bernie Madoff.
No, they are held in "street name" but the customer still owns them. You're not just a creditor of the broker. I've had a broker go bust, so I've been through the unwinding process.
A broker which just has pretend stock ownership as a book entry with the broker is called a "bucket shop".[1] A crime in most US states since the 1920s.
There may be regulatory technicalities that must be sorted out. But there isn't any reason this couldn't be handled in exactly the same way as street name shares are today. Voting rights would be interesting.