Transition from pluripotency to differentiation is a pivotal yet poorly understood developmental step. Here, we show that the tumour suppressor RASSF1A is a key player driving the early specification of cell fate. RASSF1A acts as a natural barrier to stem cell self-renewal and iPS cell generation, by switching YAP from an integral component in the β-catenin-TCF pluripotency network to a key factor that promotes differentiation. We demonstrate that epigenetic regulation of the Rassf1A promoter maintains stemness by allowing a quaternary association of YAP–TEAD and β-catenin–TCF3 complexes on the Oct4 distal enhancer. However, during differentiation, promoter demethylation allows GATA1-mediated RASSF1A expression which prevents YAP from contributing to the TEAD/β-catenin–TCF3 complex. Simultaneously, we find that RASSF1A promotes a YAP–p73 transcriptional programme that enables differentiation. Together, our findings demonstrate that RASSF1A mediates transcription factor selection of YAP in stem cells, thereby acting as a functional “switch” between pluripotency and initiation of differentiation.