Coronaviruses employ a genetic economy by encoding multifunctional proteins that function in viral replication and also modify the host environment to disarm the innate immune response. The coronavirus papain-like protease 2 (PLP2) domain possesses protease activity, which cleaves the viral replicase polyprotein, and also DUB activity (deconjugating ubiquitin/ubiquitin-like molecules from modified substrates) using identical catalytic residues. To separate the DUB activity from the protease activity, we employed a structure-guided mutagenesis approach and identified residues that are important for ubiquitin binding. We found that mutating the ubiquitin-binding residues results in a PLP2 that has reduced DUB activity but retains protease activity. We engineered a recombinant murine coronavirus to express the DUB mutant and showed that the DUB mutant virus activated an earlier type I interferon response in macrophages and exhibited reduced replication in mice. The results of this study demonstrate that PLP2/DUB is an interferon antagonist and a virulence trait of coronaviruses.