The surge of silver nanoparticles (AgNPs) utilization in daily products has raised the concern over their biotoxicity. The concerned biomedical and environmental biotoxicity has raised the quest of biomolecules for the synthesis of AgNPs with better biocompatibility. The emergence of biogenic biosurfactants has sought attention to solve the limitation of synthesizing controlled, stable and biocompatible nanoparticles; owing to their peculiar property of amphiphilic nature. This study provides a novel approach for functionalizing the silver nanoparticles (AgNPs) using lipopeptide biosurfactant extracted from Brevibacterium casei LS14 for higher in vivo environmental biocompatibility. Microbial surfactant was extracted, purified, and characterized using nuclear magnetic resonance (NMR) showing the presence of chemical moieties like carboxyl, methoxy, and amide. Successful functionalization of AgNP termed “F-AgNP” was done to produce AgNPs with a size of 45.0 ± 2.1 nm. The optical characterization of F-AgNP showed an SPR peak at 404 nm in UV-Visible spectra and zeta potential of − 25.5 ± 8.5 mV. In vivo molecular cytotoxicity analysis with embryonic zebrafish determined an LC50 of 50.2 µg/ml for F-AgNP compared to 33.6 µg/ml of unfunctionalized AgNP (U-AgNP). The mechanistic evaluation depicted the concentration-dependent higher cellular and molecular biocompatibility of F-AgNP compared to U-AgNP with less ROS and apoptosis induction due internalization and interaction of F-AgNP with different amino acids of metabolic proteins like Sod1 and P53 proteins via hydrogen bonds having a variable bond-length to influence their expression. The study delineated the molecular mechanism and suggested a sustainable approach to functionalize AgNP using biosurfactants with for biomedical and environmental applications.