The effect of Ag particle size on oxygen reduction reaction (ORR) at the cathode was investigated in anion exchange membrane direct glycerol fuel cells (AEM-DGFC) with oxygen as an oxidant. At the anode, high purity glycerol (99.8 wt%) or crude glycerol (88 wt%, from soybean biodiesel) was used as fuel, and commercial Pt/C served as the anode catalyst. A solution phase-based nanocapsule synthesis method was successfully developed to prepare the non-precious Ag/C cathode catalyst, with LiBEt3H as a reducing agent. XRD and TEM characterizations show that as-synthesized Ag nanoparticles (NP) with a size of 2–9 nm are well dispersed on the Vulcan XC-72 carbon black support. Commercial Ag nanoparticles with a size of 20–40 nm were also supported on carbon black as a control sample. The results show that higher peak power density was obtained in AEM-DGFC employing an Ag-NP catalyst with smaller particle size: nanocapsule made Ag-NP > commercial Ag-NP (Alfa Aesar, 99.9%). With the nanocapsule Ag-NP cathode catalyst, the peak power density and open circuit voltage (OCV) of AEM-DGFC with high-purity glycerol at 80 °C are 86 mW cm−2 and 0.73 V, respectively. These are much higher than 45 mW cm−2 and 0.68 V for the AEM-DGFC with the commercial Ag/C cathode catalyst, which can be attributed to the enhanced kinetics and reduced internal resistance. Directly fed with crude glycerol, the AEM-DGFC with the nanocapsule Ag-NP cathode catalyst shows an encouraging peak power density of 66 mW cm−2, which shows great potential of direct use of biodiesel waste fuel for electricity generation.