Microbial fermentation of by-products is a renewable and efficient technique in the development of a range of useful products. In this study, protease synthesis by Paenibacillus sp. TKU052 was carried out on culture media containing some common seafood processing by-products (SPBPs) as the sole source of carbon and nitrogen (C/N). The most suitable C/N nutrition source for the production of proteases was found to be 3.0% (w/v) demineralized crab shells powder (deCSP) and maximal enzyme activity of 4.41 ± 0.16 U/mL was detected on the third day of the culture. Two proteases (P1 and P2) with a similar molecular weight of 31 kDa were successfully isolated and purified from the 3-day deCSP-containing medium. Both P1 and P2 exhibited the highest activity of gelatin hydrolysis at pH 6 and 60 °C. The gelatin hydrolysates catalyzed by Paenibacillus TKU052 proteases were evaluated for biological activities, including 2,2-diphenyl-1-picrylhydrazyl (DPPH) radical scavenging, angiotensin-I converting enzyme (ACE) inhibition, and prebiotic activities. The gelatin hydrolysates expressed 31.76–43.95% DPPH radical scavenging activity and 31.58–36.84% ACE inhibitory activity, which was higher than those from gelatin. Gelatin hydrolysates also showed the growth-enhancing effect on Bifidobacterium bifidum BCRC 14615 with an increase to 135.70–147.81%. In short, Paenibacillus sp. TKU052 could be a potential strain to utilize crab shell wastes to produce proteases for bio-active peptides’ preparation.