Signaling by bone morphogenetic proteins (Bmps) plays a pivotal role in developmental and pathological processes, and is regulated by a complex interplay with secreted Bmp binding factors, including Crossveinless 2 (Cvl2). Although structurally related to the Bmp antagonist Chordin, Crossveinless 2 has been described to be both a Bmp agonist and antagonist. Here, we present the first loss-of-function study of a vertebrate cvl2 homologue, showing that zebrafish cvl2 is required in a positive feedback loop to promote Bmp signaling during embryonic dorsoventral patterning. In vivo, Cvl2 protein undergoes proteolytic cleavage and this cleavage converts Cvl2 from an anti- to a pro-Bmp factor. Embryonic epistasis analyses and protein interaction assays indicate that the pro-Bmp function of Cvl2 is partly accomplished by competing with Chordin for binding to Bmps. Studies in cell culture and embryos further suggest that the anti-Bmp effect of uncleaved Cvl2 is due to its association with the extracellular matrix, which is not found for cleaved Cvl2. Our data identify Cvl2 as an essential pro-Bmp factor during zebrafish embryogenesis, emphasizing the functional diversity of Bmp binding CR-domain proteins. Differential proteolytic processing as a mode of regulation might account for anti-Bmp effects in other contexts.