Bismuth oxide nanoparticles with appropriate surface chemistry exhibit many interesting properties that can be utilized in a variety of applications. This paper describes a new route to the surface modification of bismuth oxide nanoparticles (Bi2O3 NPs) using functionalized beta-Cyclodextrin (β-CD) as a biocompatible system. The synthesis of Bi2O3 NP was done using PVA (poly vinyl alcohol) as the reductant and the Steglich esterification procedure for the functionalization of β-CD with biotin. Ultimately, the Bi2O3 NPs are modified using this functionalized β-CD system. The particle size of the synthesized Bi2O3 NPs is found to be in the range of 12–16 nm. The modified biocompatible systems were characterized using different characterization techniques such as Fourier transform infrared spectroscopy (FTIR), transmission electron microscopy (TEM), scanning electron microscopy (SEM), X-ray powder diffraction (XRD) and Differential Scanning Calorimetric analysis (DSC). Additionally, the antibacterial and anticancerous effects of the surface-modified Bi2O3 NP system were also investigated.