Trophoblast giant cells are instrumental in promoting blood flow towards the mouse embryo by invading the uterine endometrium and remodelling the maternal vasculature. This process involves the degradation of the perivascular smooth muscle layer and the displacement of vascular endothelial cells to form trophoblast-lined blood sinuses. How this vascular remodelling is achieved at the molecular level remains largely elusive. Here, we show that two placenta-specific cathepsins, Cts7 and Cts8, are expressed in distinct but largely overlapping subsets of giant cells that are in direct contact with maternal arteries. We find that Cts8, but not Cts7, has the capacity to mediate loss of smooth muscle alpha-actin and to disintegrate blood vessels. Consequently, conditional ubiquitous overexpression of Cts8 leads to midgestational embryonic lethality caused by severe vascularization defects. In addition, both cathepsins determine trophoblast cell fate by inhibiting the self-renewing capacity of trophoblast stem cells when overexpressed in vitro. Similarly, transgenic overexpression of Cts7 and Cts8 affects trophoblast proliferation and differentiation by prolonging mitotic cell cycle progression and promoting giant cell differentiation, respectively. We also show that the cell cycle effect is directly caused by some proportion of CTS7 localizing to the nucleus, highlighting the emerging functional diversity of these typically lysosomal proteases in distinct intracellular compartments. Our findings provide evidence for the highly specialized functions of closely related cysteine cathepsin proteases in extra-embryonic development, and reinforce their importance for a successful outcome of pregnancy.