Insulin-producing cells derived from human embryonic stem cells (hESCs) or induced pluripotent stem cells (iPSCs) have for long been a promising, but elusive treatment far from clinical translation into type 1 diabetes therapy. However, the field is now on the verge of moving such insulin-producing cells into clinical trials. Although stem cell therapies provide great opportunities, there are also potential risks such as teratoma formation associated with the treatment. Many considerations are needed on how to proceed with clinical translation, including whether to use hESCs or iPSCs, and whether encapsulation of tissue will be needed. This review aims to give an overview of the current knowledge of stem cell therapy outcomes in animal models of type 1 diabetes and a proposed road map towards the clinical setting with special focus on the potential risks and hurdles which needs to be considered. From a clinical point of view, transplantation of insulin-producing cells derived from stem cells must be performed without immune suppression in order to be an attractive treatment option. Although costly and highly labour intensive, patient-derived iPSCs would be the only solution, if not clinically successful encapsulation or tolerance induction protocols are introduced.