The Muscleblind-like protein family (MBNL) plays an important role in regulating the transition between differentiation and pluripotency and in the pathogenesis of myotonic dystrophy type 1 (DM1), a CTG expansion disorder. How different MBNL isoforms contribute to the differentiation and are affected in DM1 has not been investigated. Here, we show that the MBNL1 cytoplasmic, but not nuclear, isoform promotes neurite morphogenesis and reverses the morphological defects caused by expanded CUG RNA. Cytoplasmic MBNL1 is polyubiquitinated by lysine 63 (K63). Reduced cytoplasmic MBNL1 in the DM1 mouse brain is consistent with the reduced extent of K63 ubiquitination. Expanded CUG RNA induced the deubiqutination of cytoplasmic MBNL1, which resulted in nuclear translocation and morphological impairment that could be ameliorated by inhibiting K63-linked polyubiquitin chain degradation. Our results suggest that K63-linked ubiquitination of MBNL1 is required for its cytoplasmic localization and that deubiquitination of cytoplasmic MBNL1 is pathogenic in the DM1 brain.