Amyloids are often associated with pathologic processes such as in Alzheimer's disease (AD), but can also underlie physiological processes such as pigmentation. Formation of pathological and functional amyloidogenic substrates can require precursor processing by proteases, as exemplified by the generation of Aβ peptide from amyloid precursor protein (APP) by beta-site APP cleaving enzyme (BACE)1 and γ-secretase. Proteolytic processing of the pigment cell-specific Melanocyte Protein (PMEL) is also required to form functional amyloid fibrils during melanogenesis, but the enzymes involved are incompletely characterized. Here we show that the BACE1 homologue BACE2 processes PMEL to generate functional amyloids. BACE2 is highly expressed in pigment cells and Bace2(-/-) but not Bace1(-/-) mice display coat color defects, implying a specific role for BACE2 during melanogenesis. By using biochemical and morphological analyses, combined with RNA silencing, pharmacologic inhibition, and BACE2 overexpression in a human melanocytic cell line, we show that BACE2 cleaves the integral membrane form of PMEL within the juxtamembrane domain, releasing the PMEL luminal domain into endosomal precursors for the formation of amyloid fibrils and downstream melanosome morphogenesis. These studies identify an amyloidogenic substrate of BACE2, reveal an important physiological role for BACE2 in pigmentation, and highlight analogies in the generation of PMEL-derived functional amyloids and APP-derived pathological amyloids.