Mutation of tet methylcytosine dioxygenase 2 (encoded by TET2) drives myeloid malignancy initiation and progression^1,2,3. TET2 deficiency is known to cause a globally opened chromatin state and activation of genes contributing to aberrant haematopoietic stem cell self-renewal^4,5. However, the open chromatin observed in TET2-deficient mouse embryonic stem cells, leukaemic cells and haematopoietic stem and progenitor cells⁵ is inconsistent with the designated role of DNA 5-methylcytosine oxidation of TET2. Here we show that chromatin-associated retrotransposon RNA 5-methylcytosine (m⁵C) can be recognized by the methyl-CpG-binding-domain protein MBD6, which guides deubiquitination of nearby monoubiquitinated Lys119 of histone H2A (H2AK119ub) to promote an open chromatin state. TET2 oxidizes m⁵C and antagonizes this MBD6-dependent H2AK119ub deubiquitination. TET2 depletion thereby leads to globally decreased H2AK119ub, more open chromatin and increased transcription in stem cells. TET2-mutant human leukaemia becomes dependent on this gene activation pathway, with MBD6 depletion selectively blocking proliferation of TET2-mutant leukaemic cells and largely reversing the haematopoiesis defects caused by Tet2 loss in mouse models. Together, our findings reveal a chromatin regulation pathway by TET2 through retrotransposon RNA m⁵C oxidation and identify the downstream MBD6 protein as a feasible target for developing therapies specific against TET2 mutant malignancies.