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Peelchain as a blockchain money laundering technique


A Peelchain can be defined as a spending transaction pattern in a blockchain. It can be considered a pattern because a wallet owner (assuming a private wallet owner) repeatedly transfers some of his wallet's funds to the same Service Provider of preference at irregular intervals.


Although Peelchains can be found in service wallets (like non-private exchange wallets), we will attempt to explain a Peelchain using a private wallet's spending behavior for simplification purposes.


Imagine that your wallet's funds represent a nice juicy apple you will eventually consume. You may decide to cut it in slices! So, first, you cut a slice and eat it. Then you cut another and eat it again. And then again. These repeated actions form a pattern. Let's call that a peelchain. You have gradually consumed your apple or some of it anyway.


A Peelchain Example

Let's see that in the Bitcoin blockchain environment using "Bob's" Wallet.

Bob initially holds a 12BTC UTXO (Bitcoin Unspent Transaction Output) in his wallet address - Currently referenced as "Bob's Address (A)."


Bob decides to withdraw "a slice" of his total holding, sending 2BTC to his Service Provider of Preference and keeping 10 BTC unspent. The service provider of preference can be, for example, an Exchange Service (in our example, let's call it "Exchange XYZ") where he can convert his crypto to Fiat money and then withdraw it to his bank account, or it can be a mixing service, a gambling site, etc.

He now has a 10 BTC UTXO balance left, which the Bitcoin wallet that Bob uses automatically saves in a new address - now referenced as "Bob's Address (B)," which is still under Bob's control.


The "address change" from "A" to "B" is a feature that some of the numerous Bitcoin wallets can utilize following any transaction. So, every time Bob makes a transaction, he may get his balance in a new address. Hence, he sequentially gets his remaining balance in new wallet addresses (B, C, D, E & F) under his control after every transaction. The idea behind Bitcoin's constant address change is to enhance privacy for the wallet owner.


In any case, in an hour, day, week, year, or whatever, Bob decides to make another tactical transfer to his deposit address at "Exchange XYZ." Hence, he transfers 2BTC more and is now left with 8BTC in a brand-new address.


The procedure of repeatedly transferring (peeling) an amount of crypto towards the same Service Provider and constantly have an address change for the remaining amount (the chain of changes) is called a peelchain. Peelchains are not illegal by all means! But they define a pattern. This pattern can be found in both legitimate and illegitimate transactions. For example, someone could pay his tuition fees in Bitcoin at regular intervals and choose to get his "change" from his original holding in a new address every time.


Notice the Red arrows representing the "Peels" towards the Service Provider of his preference and the Green arrows representing the "Chain" of changed addresses. Thus, the title "Peelchain."


We have explained peelchains using Bob's privately owned wallet example.

Peelchains also apply in service wallets (Like wallets under the control of a crypto exchange), but with different parameters and features.


Why should AML experts be aware of peelchain patterns?

Peelchain transactions can be appealing to Money Launderers. To avoid raising suspicions or red flags, they could attempt to launder their illegally obtained proceeds by regularly depositing small, under the threshold amounts to their Service Provider of preference.


As an AML expert, you should be well informed and trained to recognize and understand such blockchain patterns, investigate their legitimacy further, and ultimately protect the company you work for from becoming a money laundering vehicle for criminals.


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