A main mechanism of β-cell dysfunction in diabetes is loss of identity, controlled by transcription factors that induce identity gene expression and disallowed gene repression. How transcription factors facilitate simultaneous expression and repression is not fully understood, representing a knowledge gap in diabetes research. We identify the transcriptional co-factors transducin β-like 1 x-linked (TBL1X) and its homolog TBL1X-related (TBL1XR1, together TBL/R1) as crucial regulators of β-cell identity and determinants of diabetes development and progression. β-cell specific TBL/R1 knockout in mice leads to progressive hypoinsulinemia and hyperglycemia. scRNA-sequencing reveals loss of β-cells, emergence of polyhormonal cells, and reduced β-cell maturity upon TBL/R1 knockout. Interactome screens and chromatin immunoprecipitation show TBL/R1 directly regulate insulin promoter activity through a PAX6-HDAC3 gene regulatory network, evident also in human models. TBL/R1 associates with diabetes in humans, thus our study uncovers an additional regulatory layer maintaining β-cell identity crucial for diabetes development and progression.