Patterning of vertebrate melanophores is essential for mate selection and protection from UV-induced damage. Patterning can be influenced by circulating long-range factors, such as hormones, but it is unclear how their activity is controlled in recipient cells to prevent excesses in cell number and migration. The zebrafish wanderlust mutant harbors a mutation in the sheddase bace2 and exhibits hyperdendritic and hyperproliferative melanophores that localize to aberrant sites. We performed a chemical screen to identify suppressors of the wanderlust phenotype and found that inhibition of insulin/PI3Kg/mTOR signaling rescues the defect. In normal physiology, Bace2 cleaves the insulin receptor, whereas its loss results in hyperactive insulin/PI3K/mTOR signaling. Insulin B, an isoform enriched in the head, drives the melanophore defect. Melanoma is malignant skin cancer derived from transformed melanocytes. Bace2 also negatively regulates melanoma cell proliferation and affects morphology. Loss of Bace2 leads to early onset tumors with migratory and invasive phenotype. These results suggest that signaling from a long-distance factor, insulin, can be negatively regulated by a melanophore-specific expression of a sheddase and melanoma cells utilize this mechanism to regulate tumor cell progression.