Pluripotent embryonic stem cells (ESCs) undergo self-renewal until stimulated to differentiate along specific lineage pathways. Many of the transcriptional networks that drive reprogramming of a self-renewing ESC to a differentiating cell have been identified. However, fundamental questions remain unanswered about the epigenetic programs that control these changes in gene expression. Here we report that the histone ubiquitin hydrolase ubiquitin-specific protease 22 (USP22) is a critical epigenetic modifier that controls this transition from self-renewal to differentiation. USP22 is induced as ESCs differentiate and is necessary for differentiation into all three germ layers. We further report that USP22 is a transcriptional repressor of the locus encoding the core pluripotency factor sex-determining region Y-box 2 (SOX2) in ESCs, and this repression is required for efficient differentiation. USP22 occupies the Sox2 promoter and hydrolyzes monoubiquitin from ubiquitylated histone H2B and blocks transcription of the Sox2 locus. Our study reveals an epigenetic mechanism that represses the core pluripotency transcriptional network in ESCs, allowing ESCs to transition from a state of self-renewal into lineage-specific differentiation programs.