Stem cells remain quiescent in vivo and become activated in response to external stimuli. However, the mechanism regulating the quiescence-activation balance of bone-marrow-derived mesenchymal stem cells (BM-MSCs) is still unclear. Herein, we demonstrated that CYP7B1 was the common critical molecule that promoted activation and impeded quiescence of BM-MSCs under inflammatory stimulation. Mechanistically, CYP7B1 degrades 25-hydroxycholesterol (25-HC) into 7α,25-dihydroxycholesterol (7α,25-OHC), which alleviates the quiescence maintenance effect of 25-HC through Notch3 signaling pathway activation. CYP7B1 expression in BM-MSCs was regulated by NF-κB p65 under inflammatory conditions. BM-MSCs from CYP7B1 conditional knockout (CKO) mice had impaired activation abilities, relating to the delayed healing of bone defects. Intravenous infusion of BM-MSCs overexpressing CYP7B1 could improve the pathological scores of mice with collagen-induced arthritis. These results clarified the quiescence-activation regulatory mechanism of BM-MSCs through the NF-κB p65-CYP7B1-Notch3 axis and provided insight into enhancing BM-MSCs biological function as well as the subsequent therapeutic effect.