The paracaspase Malt1 is a central regulator of antigen receptor signaling that is frequently mutated in human lymphoma. As a scaffold, it assembles protein complexes for NF-κB activation, and its proteolytic domain cleaves negative NF-κB regulators for signal enforcement. Still, the physiological functions of Malt1-protease are unknown. We demonstrate that targeted Malt1-paracaspase inactivation induces a lethal inflammatory syndrome with lymphocyte-dependent neurodegeneration in vivo. Paracaspase activity is essential for regulatory T cell (Treg) and innate-like B cell development, but it is largely dispensable for overcoming Malt1-dependent thresholds for lymphocyte activation. In addition to NF-κB inhibitors, Malt1 cleaves an entire set of mRNA stability regulators, including Roquin-1, Roquin-2, and Regnase-1, and paracaspase inactivation results in excessive interferon gamma (IFNγ) production by effector lymphocytes that drive pathology. Together, our results reveal distinct threshold and modulatory functions of Malt1 that differentially control lymphocyte differentiation and activation pathways and demonstrate that selective paracaspase blockage skews systemic immunity toward destructive autoinflammation.