Formylglycine-generating enzyme (FGE) post-translationally converts a specific cysteine in newly synthesized sulfatases to formylglycine (FGly). FGly is the key catalytic residue of the sulfatase family, comprising 17 nonredundant enzymes in human that play essential roles in development and homeostasis. FGE, a resident protein of the endoplasmic reticulum, is also secreted. A major fraction of secreted FGE is N-terminally truncated, lacking residues 34-72. Here we demonstrate that this truncated form is generated intracellularly by limited proteolysis mediated by proprotein convertase(s) (PCs) along the secretory pathway. The cleavage site is represented by the sequence RYSR(72)↓, a motif that is conserved in higher eukaryotic FGEs, implying important functionality. Residues Arg-69 and Arg-72 are critical because their mutation abolishes FGE processing. Furthermore, residues Tyr-70 and Ser-71 confer an unusual property to the cleavage motif such that endogenous as well as overexpressed FGE is only partially processed. FGE is cleaved by furin, PACE4, and PC5a. Processing is disabled in furin-deficient cells but fully restored upon transient furin expression, indicating that furin is the major protease cleaving FGE. Processing by endogenous furin occurs mostly intracellularly, although also extracellular processing is observed in HEK293 cells. Interestingly, the truncated form of secreted FGE no longer possesses FGly-generating activity, whereas the unprocessed form of secreted FGE is active. As always both forms are secreted, we postulate that furin-mediated processing of FGE during secretion is a physiological means of higher eukaryotic cells to regulate FGE activity upon exit from the endoplasmic reticulum.