The cysteine protease inhibitor cystatin M/E is a key regulator of a biochemical pathway that leads to epidermal terminal differentiation by inhibition of its target proteases cathepsin L, cathepsin V, and legumain. Inhibition of cathepsin L is important in the cornification process of the skin, as we have recently demonstrated that cathepsin L is the elusive processing and activating protease for transglutaminase 3, an enzyme that is responsible for crosslinking of structural proteins in cornified envelope formation. Here, we study the localization of all players of this pathway in the human hair follicle and nail unit in order to elucidate their possible role in the biology of these epidermal appendages. We found that cathepsin L and transglutaminase 3 specifically colocalize in the hair bulb and the nail matrix, the regions that provide cells that terminally differentiate to the hair fiber and the nail plate, respectively. Furthermore, transglutaminase 3 also colocalizes with the structural proteins loricrin and involucrin, which are established transglutaminase substrates. These findings suggest that cathepsin L and transglutaminase 3 could be involved in the pathway that leads to terminal differentiation, not only in the epidermis but also in the human hair follicle and nail unit.