The Ddi1/DDI2 proteins are ubiquitin shuttling factors, implicated in a variety of cellular functions. In addition to ubiquitin-binding and ubiquitin-like domains, they contain a conserved region with similarity to retroviral proteases, but whether and how DDI2 functions as a protease has remained unknown. Here, we show that DDI2 knockout cells are sensitive to proteasome inhibition and accumulate high-molecular weight, ubiquitylated proteins that are poorly degraded by the proteasome. These proteins are targets for the protease activity of purified DDI2. No evidence for DDI2 acting as a de-ubiquitylating enzyme was uncovered, which could suggest that it cleaves the ubiquitylated protein itself. In support of this idea, cleavage of transcription factor NRF1 is known to require DDI2 activity in vivo. We show that DDI2 is indeed capable of cleaving NRF1 in vitro but only when NRF1 protein is highly poly-ubiquitylated. Together, these data suggest that DDI2 is a ubiquitin-directed endoprotease.