Members of the Tolloid (Tld) family of metalloproteinases play an essential role in Bone Morphogenetic Protein (BMP) gradient formation during embryonic dorsal-ventral axis patterning, by liberating BMPs from inhibitory complexes. Tolloid enzymes also play important roles during ECM processing. However, the mechanism and regulation of Tolloid is unclear. Using in vitro biophysical and biochemical approaches combined with in vivo analysis of Tolloid activity, this study aims to complete a structure-function analysis of Tolloid in relation to its activity in the Drosophila early embryo. The mechanism and regulation of Tolloid activity are dissected, with a specific focus on the roles of the non-catalytic CUB domains. In vitro activity analysis and binding assays identify a role for the N-terminal CUB domains of Tolloid in interaction with the extracellular matrix protein Collagen IV. This interaction enhances cleavage of the Tolloid substrate Sog. In contrast, the C-terminal CUB domains, CUB4 and CUB5, mediate interaction with substrate Sog. Electron Microscopy and Small Angle X-ray Scattering demonstrate that curvature of monomeric Drosophila Tolloid brings these Sog-binding CUB domains into close proximity to the N-terminal protease domain. Furthermore, the importance of these interactions is investigated in vivo using point mutation data from classical mutational analysis of Drosophila Tolloid. In addition, the BMP gradient is recapitulated in vivo in the absence of Tolloid CUB domains through artificially tethering the Tolloid protease domain to Sog. Extrapolation of the data presented here suggests that the dual use of CUB domains in substrate and ECM interactions may function to fine-tune Tolloid activity to a particular context.