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.