Severed axon tips reform growth cones following spinal cord injury that fail to regenerate, in part, because they become embedded within an inhibitory extracellular matrix. Chondroitin sulfate proteoglycans (CSPGs) are the major axon inhibitory matrix component that is increased within the lesion scar and in perineuronal nets around deafferented neurons. We have recently developed a novel peptide modulator (intracellular sigma peptide) of the cognate receptor of CSPGs, protein tyrosine phosphatase σ (RPTPσ), which has been shown to markedly improve sensorimotor function, micturition, and coordinated locomotor behavior in spinal cord contused rats. However, the mechanism(s) underlying how modulation of RPTPσ mediates axon outgrowth through inhibitory CSPGs remain unclear. Here, we describe how intracellular sigma peptide modulation of RPTPσ induces enhanced protease Cathepsin B activity. Using DRG neurons from female Sprague Dawley rats cultured on an aggrecan/laminin spot assay and a combination of biochemical techniques, we provide evidence suggesting that modulation of RPTPσ regulates secretion of proteases that, in turn, relieves CSPG inhibition through its digestion to allow axon migration though proteoglycan barriers. Understanding the mechanisms underlying RPTPσ modulation elucidates how axon regeneration is impaired by proteoglycans but can then be facilitated following injury. Following spinal cord injury, chondroitin sulfate proteoglycans (CSPGs) upregulate and potently inhibit axon regeneration and functional recovery. Protein tyrosine phosphatase σ (RPTPσ) has been identified as a critical cognate receptor of CSPGs. We have previously characterized a synthetic peptide (intracellular sigma peptide) that targets the regulatory intracellular domain of the receptor to allow axons to regenerate despite the presence of CSPGs. Here, we have found that one important mechanism by which peptide modulation of the receptor enhances axon outgrowth is through secretion of a protease, Cathepsin B, which enables digestion of CSPGs. This work links protease secretion to the CSPG receptor RPTPσ for the first time with implications for understanding the molecular mechanisms underlying neural regeneration and plasticity.