Attorney Tarık Ziya Karanfil writes: In systems like cryptocurrency exchanges, does losing money through member transactions constitute the crime of fraud?

Attorney Tarık Ziya Karanfil’s article titled “In systems like cryptocurrency exchanges, does losing money through member transactions constitute the crime of fraud?” is as follows;

"I have provided a brief explanation regarding whether losing money through transactions made by members in systems like Çiftlik Bank or cryptocurrency exchanges can be evaluated within the scope of the crime of fraud.

In order for us to evaluate whether a crime has been committed, the act that we claim is contrary to the legal order must be clearly defined as a crime in the law. Furthermore, this act must be executed in accordance with the manner in which it is defined in the law. For this, the material and moral elements of the crime must be realized.

There must be no grounds for justification that would eliminate the illegality of this act that fits the definition. After a crime has emerged, for the perpetrator's criminal liability to arise, the perpetrator must be at fault, there must be no circumstances affecting their culpability, and there must be no personal reason that eliminates the penalty.

It is impossible to speak of the existence of a crime that has no subject. In this respect, every act that constitutes a crime must necessarily have a subject. The subject of the crime of fraud is the “benefit” that the perpetrator provides for themselves or for someone else.

For this reason, we will base our following explanations on the assumption that the benefit, which is the subject of fraud, is “money”.

Fraud, in its simplest definition, is obtaining property or money from someone unfairly by deceiving them. Article 157 of the Law states: “A person who deceives someone with fraudulent behavior and provides a benefit to themselves or another person to the detriment of that person or someone else shall be sentenced to imprisonment from one to five years and a judicial fine of up to five thousand days.”

Article 158 of the Law lists the qualified forms of the crime. Article 158/1.f states: “If the crime of fraud is committed by using information systems as a tool, a sentence of imprisonment from three to ten years and a judicial fine of up to five thousand days shall be imposed. The lower limit of the prison sentence cannot be less than four years, and the amount of the judicial fine cannot be less than twice the benefit obtained from the crime.” Thus, the crime of fraud committed by using information systems as a tool is defined. In this case, the crime of fraud committed by using information systems as a tool is to provide an unfair benefit to oneself or another person to the detriment of someone else by deceiving that person through fraudulent behavior carried out using information systems as a tool.

If we are to say that there is a crime of fraud in the question asked, we will need to examine these actions within the framework of the crime of fraud committed by using information systems as a tool.

(Note: In both cases, since the fraudulent activities were carried out through a company, although the provision in Article 158/1.h of the Turkish Penal Code (TCK) regarding “merchants or company managers or persons acting on behalf of a company during their commercial activities; cooperative managers within the scope of the cooperative's activity” might come to mind, since a heavier penalty is foreseen in Article 158/1.f of the TCK for cases committed “by using information systems, banks or credit institutions as a tool,” it is necessary to proceed according to this paragraph.)

For the crime of fraud committed by using information systems as a tool, regulated in TCK Art. 158/1-f, to occur, as a primary condition, the perpetrator must engage in “fraudulent behavior” as included in the provision of TCK Art. 157, where the basic form of the crime of fraud is regulated. Deception must not consist merely of an idea in the world of thought of individuals, but must become a behavior and constitute the nature of the behavior put forward.

In Court of Cassation (Yargıtay) decisions, fraud is defined as all kinds of actions that deceive, mislead, schemes, tricks, games, or intrigues against the other party. According to the Court of Cassation, these actions can be in the form of a display or can emerge as hidden behaviors. In a display, the perpetrator claims to possess capabilities and titles they do not have, while in hidden behavior, they conceal their own situation or status. Especially, the fraud must be of a nature that can “deceive”. However, there is no objective measure for whether deception in the crime of fraud is of a deceptive nature.

When actions that might be characterized as a legal dispute at first glance become a threat to public order, it can be said that fraudulent behavior is a crime in order to secure general commercial relations. For this reason, it is undoubtedly the criminal judge who will determine whether the “deceptive fraud” exceeds the boundaries of private law, in other words, when private law fraud reaches a level of sufficiency that constitutes a criminal offense. While making this determination, the judge should consider the dimension and variety that technological and commercial developments have added to the concept of fraud, current social ethical values, and also private law regulations, and should also take into account the danger created by the perpetrator who resorts to fraud to obtain a benefit and the criminological reflection of the fraud.

After these general explanations, in the examination of the concrete question:

Over time, methods of committing the crime of fraud through information systems have developed. Some of these are; Electronic commerce fraud, digital advertising fraud, fraud through social media accounts, fraud through social engineering methods, fraud through online gaming, gambling and betting sites, and finally, the one related to our topic, “Ponzi pyramid” fraud. Under the sub-heading of Ponzi pyramid fraud, the examples of Çiftlik Bank and cryptocurrency should be evaluated.

A Ponzi pyramid is a fraud system that expands in the form of a pyramidal structure, where the profit promised to an investor is met with money taken from other investors who join later.

The Court of Cassation has stated that the pyramid system constitutes the crime of fraud for the reasons that “…as the links of the chain expand due to the system, it will become difficult to recruit members, after a certain period it will become impossible to recruit members and the system will collapse at this stage, and those who are the last members have no possibility of making money in this process, and this situation is consciously hidden.”

In the Çiftlik Bank example;

Çiftlik Bank, which has a system based on making money by playing games; is an internet game where players buy virtual animals (for example, chickens, goats, cows, etc.) over the internet, raise them, and earn money through their products in the virtual environment.

Through Çiftlik Bank, money was collected from a large number of people, the exact number of which could not be determined, through the promise of high returns in a way that is not consistent with the ordinary flow of life. Although high returns were promised to investors; it is clear that despite the collection of money through the promise of irrationally high earnings in Çiftlik Bank, there was no investment area that would provide profits at these rates, and it was not possible to realize the promised return due to the nature of the system. There was also no production to realize the promised earnings. Unlike the Ponzi pyramid, although participants were not directly asked to bring new participants; this element was attempted to be bypassed with the “referral income” application. A pyramid sales system was formed.

In the Çiftlik Bank indictment; “it was stated that in the early periods of the Çiftlik Bank game, memberships were provided through a referral system to encourage players and advantages were given to old members as referral income, and later the referral system was ended and a dealership network was created, and also a clan application was developed, and it was emphasized that with these methods, it was wanted to guarantee that investor players increase their investments and that new player participation continues constantly. In the indictment, where it was stated that some of the previous referred players continued their activities as dealership owners, it was expressed that the dealers were pioneers in the formation of clans, thus a system containing pyramid sales was created in the direction of constantly including new participants in the system and increasing the invested money.” (https://www.cnnturk.com/turkiye/ciftlik-bank-iddianamesinin-detaylari-ortaya-cikti) this issue was alleged in this way.

As a result, as in Ponzi systems, it is clear in the Çiftlik Bank example that the profit distribution system is unsustainable after a certain point and this is known from the very beginning. It is obvious that if the players had the possibility of having information about the functioning of the system, they would not have invested.

On the other hand, the fact that the founders included players in a structure where they gave the appearance that they would make a profit by hiding this feature of the system and obtained unfair benefits from them in this way constitutes the crime of fraud. In Çiftlik Bank, this fraud was committed specifically by using information systems. The promise of earnings and the fraudulent behavior aimed at misleading the members were directed at individuals through information systems. For this reason, it can be said that Çiftlik Bank, which is an example of a Ponzi pyramid, carries the elements related to the crime of fraud committed through information systems.

Cryptocurrency example;

One cannot enter the cryptocurrency exchange directly. An intermediary company is needed to enter this exchange. People who want to engage in fraudulent activity through a crypto exchange carry out various advertising activities on the internet to attract complainants to their own exchanges. They make various promises to potential customers such as gift “coins”. Virtual cryptocurrency exchanges make ‘maintenance-repair’ announcements. They use expressions such as “Our site is under infrastructure maintenance to provide better service”.

They create crisis scenarios with these. Thus, they measure the reaction of the public. Later, they solve the problem and call the user to provide information regardless of whether it is 12 or 1 at night. The user thus believes that the firm is reliable. Of course, this spreads from mouth to mouth among the public, and the firm's reputation and reliability increase. After this, someone who invests 300 invests 3 thousand. This is where the fraud begins. Then, suddenly, they go bankrupt, take the money, and vanish into thin air.

In cryptocurrency fraud, the most frequently encountered fraud crime occurs in Bitcoin trading transactions. After the person who says they will buy Bitcoin collects money, they do not provide any return to the people who gave the money. Individuals who cannot use technological developments sufficiently generally fall into this trap. People who want to get money from the virtual environment but do not have information about this subject are the primary targets of crypto fraudsters. Crypto fraudsters reach out to people who have the intention of investing in Bitcoin but cannot make this investment alone. Later, they collect money from the people they reach with the promise of buying cryptocurrency. After the fraudsters collect the money, they either do not buy Bitcoin and disappear, or they use the cryptocurrencies they bought with the money they collected for themselves.

After cryptocurrency fraudsters committing fraud through fake money, the most common cryptocurrency fraud is fraud committed through an electronic money exchange or cryptocurrency system. Fraudsters, in order to gain the victim's trust, commit fraud with crypto transfers after setting up a site similar to a cryptocurrency site.

Here, it is also necessary to dwell on the issue of whether it is the “crime of obtaining unfair benefit by using information systems” regulated in Article 244 of the TCK or the “qualified fraud” crime. In the fourth paragraph of Article 244 of the TCK; “If the person obtaining an unfair benefit for themselves or another person by committing the acts defined in the paragraphs above does not constitute another crime, a sentence of imprisonment from two to six years and a judicial fine of up to five thousand days shall be imposed.” provision is included.

Within the scope of the first paragraph of TCK Art. 244, one must block or disrupt an information system, or perform one or more of the acts in the second paragraph; such as damaging, destroying, changing, making inaccessible data in an information system, placing data into the system, or sending existing data to another place. Secondly, as a result of these actions, the perpetrator must obtain an unfair benefit for themselves or for someone else. Therefore, the crime regulated in TCK Art. 244/4 occurs as a result of the perpetrator first committing the acts defined in the first and second paragraphs of the article, and then obtaining an unfair benefit for themselves in a causal link with these acts.

When an incident in the form of obtaining unfair benefit through information systems is encountered, it should first be investigated whether the action constitutes another crime such as fraud, theft, breach of trust, or embezzlement. If the action performed fits one of these crimes, then it is not possible to apply the provision of Art. 244/4.

The most important starting point in solving the problem here is undoubtedly the element of fraud. In this vein, the most important difference between the two crimes is concentrated on the point of whether there is fraudulent behavior directed at a real person. While fraudulent behavior is committed against an information system in one, it is committed against a real person by using an information system in the other.

It must be determined whether the gainful transaction that constitutes the scope of the benefit was made by a real person or whether the benefit was obtained as a result of direct intervention in the system. If, after the intervention in the system and data has been made, a direct benefit is not obtained and the transaction regarding the provision of the benefit is carried out by a real person, then it must be accepted that the crime of fraud has occurred.

According to the Court of Cassation; if fraudulent behaviors are carried out against a real person by using an information system and the benefit is obtained as a result of influencing a human's will, it is qualified fraud; however, if the benefit obtained is provided by blocking or disrupting the functioning of the information system or by performing a number of manipulation operations on the data without displaying fraudulent behaviors towards a human, it is accepted that the crime in TCK Art. 244/4 has occurred.

In this case, it must be accepted that the crime of qualified fraud has occurred in the concrete event.

Here, it is also necessary to touch upon the relationship between the Crime of Breach of Trust and the Crime of Fraud:

In the crime of fraud, the perpetrator takes the property from the owner's hand fraudulently or by deceiving. The perpetrator obtains property that is not in their own possession. In the crime of breach of trust, the property is given to the perpetrator by the owner with consent. In the crime of fraud, the perpetrator takes delivery of the property from the owner unlawfully.

If the perpetrator's acquisition of the possession of the property to keep it or use it in a certain way occurred as a result of deceiving the possessor or owner of the property with fraudulent actions, then the crime of breach of trust has not occurred, but the crime of fraud has occurred. Because the perpetrator acted with the intent to defraud during the establishment of the trust relationship formed between them and the possessor or owner of the property. Furthermore, regarding the relationship between these two crimes, it can be said that in both the crime of fraud and the crime of breach of trust, the owner or possessor of the property transfers the possession of the property that is the subject of the crime to the perpetrator with consent. However, while the consent in question in the crime of breach of trust is a legally valid consent, the consent in question in the crime of fraud is a consent that is not legally valid. In the crime of fraud, the perpetrator's deceiving the person in front of them with fraudulent behaviors actually causes the owner or possessor of the property to give consent even though they would not have given consent. As a result of this, although these people have consented to the taking of the property, since their consent is not legally valid, a crime emerges.

After these explanations, in the concrete event of depositing money into a crypto exchange, it must be said that the crime of qualified fraud has occurred because people were induced to deposit money into the exchange through deceptive fraudulent actions."