Patients suffering from diabetes rely on the exogenous supply of insulin. Cell replacement therapy employing cadaveric islets cells has demonstrated a proof of principle for a practical cure, rendering patients insulin independent for prolonged periods of time. However, challenges remain before this innovative therapy can be widely accessed by patients in need. Donor islet material is limited, requiring the generation of an abundant source of insulin-producing pancreatic beta cells. Immunological allogeneic rejection and recurring autoreactivity contribute to eventual graft failure in all transplant recipients. Here we summarize past and current efforts to generate functional beta cells from pluripotent stem cells and highlight current knowledge on graft immune interactions. We further discuss remaining challenges of current cell replacement efforts and highlight potentially innovative approaches to aid current strategies.