Cryptocurrency has transformed the financial landscape, offering unprecedented transparency alongside new avenues for illicit activity. One of the most common tactics used by bad actors to obscure the origins of stolen or illicit funds is a method known as a peel chain. This technique involves repeatedly sending small amounts of cryptocurrency to different wallets, creating a complex web that makes it challenging for investigators to trace.
In this article, we’ll explain what a peel chain is, how it works, and how modern blockchain analytics tools like Merkle Science’s Tracker help law enforcement and compliance teams detect and disrupt these crypto money laundering schemes.
A peel chain is a money laundering method where cryptocurrency is transferred through a series of wallets, with small amounts of funds “peeled off” at each step. While the bulk of the funds continue moving forward, smaller portions are sent to new wallets or cashed out, making the illicit transactions harder to trace.
The name comes from the analogy of peeling layers off an onion: each transaction is like removing a layer, increasing the complexity of tracking the movement of funds. Peel chains exploit the transparency of blockchain technology to create a smokescreen, leaving behind a maze of micro-transactions that confuse investigators.
Here’s how a peel chain typically works:
Each step “peels off” a small part of the original sum, breaking it down into smaller, less noticeable amounts, making it difficult to pinpoint the origin or final destination.
Peel chains are a popular tool for bad actors in the crypto ecosystem because they offer multiple benefits for obfuscating illicit activities. Below are the key reasons peel chains are used:
One of the main motivations for using peel chains is to hide the origin of stolen or illicit cryptocurrency. By breaking down large sums into small, fragmented transactions, bad actors can make it appear as though the funds are unrelated or innocently obtained. This complexity makes it difficult for law enforcement to connect the dots and identify the true source of the funds.
Anti-Money Laundering (AML) tools and regulatory systems are often designed to flag large or suspicious transactions. By repeatedly peeling off smaller amounts, criminals can avoid triggering these alerts. Since most AML systems are tuned to detect single, high-value transactions, the micro-transactions in a peel chain can fly under the radar.
Criminals often deal with large sums of cryptocurrency obtained through activities such as ransomware attacks, hacks, or darknet market sales. Moving such large amounts directly into exchanges or financial systems would draw immediate attention. Peel chains allow these funds to be systematically broken down and distributed across many wallets, creating a convoluted trail that’s much harder to follow.
Peel chains are particularly effective for moving funds across jurisdictions. By repeatedly splitting and transferring funds to wallets in different countries or through exchanges in regions with lax regulatory oversight, criminals can evade detection and complicate investigations. This cross-border obfuscation makes it challenging for law enforcement agencies to collaborate effectively.
Ransomware attackers and darknet market operators frequently use peel chains to launder their proceeds. For example, after a ransomware victim pays in Bitcoin, the attackers will often use peel chains to split the payment into many smaller amounts, gradually laundering the funds and sending them to cash-out points like exchanges or mixers.
With the rise of automated tools and scripts, bad actors can execute peel chains rapidly and at scale. Automated laundering systems can move funds across hundreds of wallets within minutes, overwhelming investigators and obscuring the flow of money even further.
Criminals often use legitimate financial platforms such as centralized exchanges, peer-to-peer apps, and payment services as endpoints for peel chains. By laundering funds through these platforms, they can further obscure the illicit nature of the transactions and convert cryptocurrency into fiat currency without raising immediate suspicion.
In short, peel chains provide an effective way for bad actors to evade detection, obfuscate illicit funds, and cash out through seemingly legitimate channels.
Peel chains are not theoretical; they play a role in real-world crypto crime investigations. In August 2024, Queens District Attorney Melinda Katz announced the indictment of seven individuals in a cryptocurrency hacking case involving a peel chain.
A 61-year-old Jamaica, NY resident, who had purchased 5.75 bitcoins in 2017 as part of his retirement fund, fell victim to a sophisticated hack in November 2022. At the time, the stolen Bitcoin was valued at approximately $92,000 but had since grown to over $300,000.
The hackers moved the stolen funds through over 250 transactions over the course of eight months, a textbook example of a peel chain designed to obscure the movement of funds. Investigators traced the laundered funds to multiple accounts, including Cash App wallets. The alleged mastermind, Aaron Peterson Jr., and his accomplices used the proceeds for luxury purchases like a diamond pendant and a new Mercedes-Benz.
Through meticulous efforts, the DA’s Cyber Crime Unit was able to map out the transactions and identify the individuals involved, highlighting the importance of transaction monitoring tools and proactive investigation techniques.
While the transparency of blockchain technology makes crypto transactions publicly visible, peel chains present significant challenges for investigators, compliance teams, and financial institutions:
Peel chains involve splitting large sums into hundreds or even thousands of micro-transactions. Each transaction generates new addresses, creating an overwhelming amount of data for investigators to sift through. Identifying patterns within this volume of transactions often requires advanced analytics tools and computational resources.
Bad actors leverage automated scripts and bots to execute peel chains at high speed and scale. These tools can generate and use hundreds of wallet addresses in minutes, moving funds faster than manual investigations can keep up. The use of automation makes it increasingly difficult to identify and halt laundering activities in real-time.
Crypto transactions are borderless, enabling bad actors to distribute funds across jurisdictions with varying levels of regulatory oversight. Some regions lack sufficient AML frameworks, creating safe havens for illicit activity. Coordinating investigations across multiple legal systems can be slow, and criminals exploit these delays to their advantage.
Laundered funds often pass through mixers, privacy wallets, or anonymity-enhancing technologies to further obscure their trail. These tools break the link between the source and destination of funds, making it harder to follow the flow of crypto through peel chains.
Criminals often convert the “peeled” funds into fiat currency using centralized exchanges, peer-to-peer platforms, or apps like Cash App. These cash-out points can appear legitimate, complicating the process of flagging and freezing illicit funds. Subpoenaing records from financial institutions adds another layer of complexity to investigations.
Tracing a peel chain requires significant time and resources. Compliance teams and law enforcement agencies often face manpower and technological limitations, which bad actors exploit by creating longer, more convoluted chains.
Detecting peel chains demands a combination of advanced blockchain analytics, real-time monitoring, and cross-border collaboration to stay one step ahead of bad actors.
To stay ahead of bad actors, financial institutions, law enforcement, and compliance teams need advanced tools to trace suspicious transactions and patterns. Merkle Science’s Tracker is designed to detect complex schemes like peel chains through:
With tools like Tracker, investigators can pinpoint where the funds originate, follow the movement across wallets, and connect them to exchanges or other cash-out endpoints.
At Merkle Science, we empower organizations to trace, detect, and prevent crypto money laundering schemes like peel chains. Our behavior-based analytics tools offer the visibility and insights needed to untangle complex fund flows and bring bad actors to justice.
Ready to see how Merkle Science can help you? Request a demo today and learn how our blockchain analytics tools can enhance your crypto compliance and investigation efforts.
