Many people longed to believe in Sam Bankman-Fried

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For Peter Pan, the boy who lived in a “world made of faith and trust and pixie dust” in JM Barrie’s novel, “make-believe and true were exactly the same thing”. That made him the ideal hero of a Disney film and would have fitted him nicely to be a billionaire crypto savant.

But dreams do not always come true, and those who fly out of windows tend to crash. So it has proved for Sam Bankman-Fried, co-founder of the collapsed crypto trading platform FTX, who went on trial this week in New York, accused of fraud. He is alleged to have taken FTX’s investors and customers for what turned out to be a terrible ride.

It started so well for Bankman-Fried, a trading wunderkind whose attention span was so short that he played video games while raising capital. “I LOVE THIS FOUNDER,” responded a partner of the investment firm Sequoia when it invested in FTX. “Go for it! Swap shares with [him]! Do whatever he wants to do!” the author Michael Lewis told a friend after meeting Bankman-Fried.

The FTX co-founder has pleaded not guilty, but a visionary entrepreneur has once again become a hero only to tumble into disgrace. Elizabeth Holmes, the magnetic founder of the blood-testing company Theranos, is in prison; Adam Neumann, who promised to change the world by spreading good vibrations at WeWork, lost his aura as its value plunged in 2019.

With hindsight, all these leaders look delusional, but that was half the point. The greatest entrepreneurs carry a “reality distortion field”, as one Apple executive said of Steve Jobs. For others, the line between weaving a fantastic vision of the future and securities fraud can be quite thin.

To gain venture capital funding, they must first convince investors that they can put a dent in the universe. Then they have to keep going through all doubts and failures. “It is delusion that enables entrepreneurs to persist through adversity. Those who will not give up, despite everything, need to be slightly deranged,” says Kyle Jensen, a senior lecturer at Yale University.

As for fantasy, Donald Trump was also in a New York court this week, facing fraud charges relating to the overvaluation of his properties to obtain finance. Few apart from the former US president himself would place him in the pantheon of great entrepreneurs, but he defied reality by insisting that his Trump Tower apartment was three times its actual size.

The most compelling pitch is to go beyond moneymaking to proclaim a higher purpose. Going Infinite, Lewis’s nicely timed book on Bankman-Fried, details his devotion to “effective altruism”. He insisted that his frenetic arbitrage and location in the Bahamas helped to finance his philanthropy by making him “infinity dollars” to solve global social problems.

There were plenty of warning signs: for an altruist, he was casually indifferent to actual humans. He made commitments he didn’t mean to keep and mused privately to his co-worker and on-off lover Caroline Ellison, “In a lot of ways, I don’t really have a soul . . . there’s a pretty decent argument that my empathy is fake, my feelings are fake, my facial reactions are fake.”

But a cult wants to believe in its prophet, and Bankman-Fried rose to fame in the cultish age of crypto, when the doubters were dismissed as fiat currency heretics. He was surrounded by financial backers who urged him on, treating his flaws as signs of brilliance. He insulted academics when at university and said it was a waste of time to read books. What a genius!

Nor is the media innocent. When Bankman-Fried appeared from an Uber to meet Lewis at the latter’s California home, he was the perfect character to light up the author’s next financial narrative. Journalists prefer a colourful hero, the crazier the better, because the reader or viewer is more likely to be gripped by them, too.

The question is when does visionary self-belief cross the line into fraud? Every story told by an entrepreneur is, in a sense, a con trick: the likelihood of them capturing an enormous slice of an exaggerated addressable market is very low but everyone in the room realises that. Investors volunteer to be sprinkled with pixie dust because, after all, who knows? The venture might fly.

Being delusional also offers some kind of defence when things go badly wrong. US law requires proof of intent to defraud: if you truly believed in the magic beans you used as collateral — or in Bankman-Fried’s case, the crypto tokens that FTX minted — then you may be innocent. He insists he did not mean to break the law.

But fiduciary duties close upon the growing company as investors and lenders get involved. A fearless leader is still needed, but they must weigh their words and actions more carefully. They cannot just rely on make-believe: “This is a fantasy world, not the real world,” the judge in the Trump case wrote of his property valuations.

Peter Pan made miracles happen just by wishing, but he was a fictional character. Even the most inspiring founder must one day face reality. Sometimes, like the crocodile, it bites.

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