Summary Immunological protection of transplanted stem cell-derived islet (SC-islet) cells is yet to be achieved without chronic immunosuppression or encapsulation. Existing genetic engineering approaches to produce hypoimmunogenic SC-islet cells have so far shown variable results. Here, we show that targeting the human leukocyte antigens (HLAs) and PD-L1 alone do not sufficiently protect SC-islet cells from xeno- or allo-rejection. As an addition to these approaches, we genetically engineered SC-islet cells to secrete the cytokines IL-10, TGF-β and modified IL-2 such that they promote a tolerogenic local microenvironment by activating and expanding regulatory T cells (T regs ). These cytokine-secreting human SC-islet cells prevented xeno-rejection for up to 9 weeks post-transplantation in B6/albino mice. Thus, hESCs engineered to induce a tolerogenic local microenvironment may represent a source of replacement SC-islet cells that do not require encapsulation or immunosuppression for diabetes cell replacement therapy.