Traumatic muscle injury leads to chronic and pathologic fibrosis in skeletal muscles, primarily driven through upregulation of transforming growth factor‐β1 (TGF‐β1). Cell‐based therapies, such as injection of muscle‐derived stem cells (MDSCs), have shown promise in muscle repair. However, injected MDSCs in injured skeletal muscle can differentiate into myofibroblasts under the influence of TGF‐β1, and contribute to the development of fibrosis, limiting their regenerative potential. In this study, we created a "smart" cell‐based drug delivery system using CRISPR‐Cas9 to genetically engineer MDSCs capable of sensing TGF‐β1 and producing an antifibrotic biologic, decorin. These gene‐edited smart cells, capable of inhibiting fibrosis in a dose‐dependent and autoregulating manner, show anti‐inflammatory and antifibrotic properties in vitro, without changing the expression of myogenic and stem cell markers as well as their cell proliferation and myogenic differentiation. Additionally, differentiation down a fibrotic lineage is reduced or eliminated in response to TGF‐β1. Our results show that gene editing can be used to successfully create smart stem cells capable of producing biologic drugs with antifibrotic capabilities in a controlled and localized manner. This system provides a tool for cell‐based drug delivery as the basis for a novel therapeutic approach for a variety of diseases. [ABSTRACT FROM AUTHOR]