Ubiquitin-like (Ubl) modifications regulate nearly all cellular functions in eukaryotes with the largest superfamily of Ubl-specific proteases being Cys proteases. SENP1 is a model for this protease family and responsible for processing SUMO. Here using nuclear magnetic resonance relaxation measurements, chemical shift perturbation and enzyme kinetic analysis, we provide structural insights into the mechanism of substrate recognition coupled enzymatic activation within SENP1. We find that residues in the catalytic channel of SENP1, including the 'lid' residue Trp465, exhibit dynamics over a range of timescales, both in the presence and absence of bound substrates. The β-grasp domain of SUMO1 alone induces structural changes at ~20 Å away in the active site of SENP1, revealing the importance of this domain in activating the enzyme. These findings likely represent general properties of the mechanism of substrate recognition and processing by SENPs and other Ubl-specific proteases, and illuminate how adaptive substrate binding can allosterically enhance enzyme activity.