Pseudogenes, noncoding homologs of protein-coding genes, once considered nonfunctional evolutionary relics, have recently been linked to patient prognoses and cancer subtypes. Despite this potential clinical importance, only a handful of >12,000 pseudogenes in humans have been characterized in cancers to date. Here, we describe a previously unrecognized role for pseudogenes as potent epigenetic regulators that can demethylate and activate oncogenes. We focused on SALL4, a known oncogene in hepatocellular carcinoma (HCC) with eight pseudogenes. Using a locus-specific demethylating technology, we identified the critical CpG region for SALL4 expression. We demonstrated that SALL4 pseudogene 5 hypomethylates this region through interaction with DNMT1, resulting in SALL4 up-regulation. Intriguingly, pseudogene 5 is significantly up-regulated in a hepatitis B virus model before SALL4 induction, and both are increased in patients with HBV-HCC. Our results suggest that pseudogene-mediated demethylation represents a novel mechanism of oncogene activation in cancer.