Main proteases and papain-like proteases (PLpro) are essential coronaviral enzymes required for polypeptide processing during viral maturation. PLpro additionally cleave host cellular proteins to evade anti-viral immune responses. Here, we provide biochemical, structural and functional characterizations of PLpro from SARS-Cov-2 (PLproCoV2) and reveal differences to that of SARS (PLproSARS) in controlling interferon (IFN) and NF-kB pathways. PLproCoV2 and PLproSARS share 89% sequence similarity, yet they differ in their substrate preferences: PLproCoV2 cleaves predominantly ISG15, while PLproSARS targets preferentially ubiquitin chains and Nedd8. The crystal structure of PLproCoV2 in complex with the full-size ISG15 revealed the secondary binding site for the amino-terminal domain of ISG15, thus explaining the affinity and higher specificity, as well as indicating a role for the tyrosine 268 in positioning GRL-0617 inhibitor of PLproCoV2. In human cells, PLproCoV2 cleaves ISG15 from interferon responsive factor 3 (IRF3), blocks its nuclear translocation and reduces type I interferon responses, whereas PLproSARS preferentially mediates deubiquitination and deneddylation of critical components of the NF-kB pathway. Inhibition of PLproCoV2 by GRL-0617 blocks virus-induced cytopathogenic effect, reduces viral release from infected cells and fosters the anti-viral interferon pathway upon infection with SARS-CoV-2. We propose that therapeutic targeting of PLproCoV2 can inhibit SARS-CoV-2 infection and promote anti-viral immunity.