Smith, who is currently in South Africa with the Australia team, was banned from international cricket for a year in March 2018 for his role in a plot to cheat in a test in Cape Town.
He was also banned for a further year from holding any leadership role in the Australia team. That suspension expires at the end of next month.
Smith's appointment to captain Welsh Fire is his first permanent leadership role since the ban. He stepped in to captain Rajasthan Royals for part of the Indian Premier League season last year.
"It's an honor to be asked to captain Welsh Fire in the first year of The Hundred," Smith said.
Welsh Fire coach Gary Kirsten, a South African, said Smith's "knowledge and experience of leading teams in pressurized situations will definitely help us.
"He's got a track record of getting the best out of his players while performing to a very high standard himself, which will be key for us this summer."
Smith is set to lead Welsh Fire against Oval Invincibles in the first game of the new limited-overs competition in London on July 17. The Hundred is a league launched by the England and Wales Cricket Board where each match features two 100-ball innings in a new format for cricket. There are eight franchises and the league has attracted many of the game's top stars.
Smith was appointed captain of Australia in 2015 and was set to become one of his country's most popular players, combining his batting talent with a fresh-faced exuberance for the game.
His career took a dramatic turn in the series in South Africa in 2018 when it was revealed that he, vice-captain David Warner and teammate Cameron Bancroft had all conspired to cheat in a test by tampering with the ball on the field using a piece of sandpaper.
Warner, who came up with the plan, was also banned for a year and will never again be allowed to hold a leadership role in the Australia team. Bancroft, who carried out the tampering on Warner's orders, was banned for nine months.
Smith was banned for not doing anything to stop the cheating. A Cricket Australia investigation also found he instructed Bancroft to hide the sandpaper down his trousers when it became apparent they had been found out.
Smith broke down in tears at a news conference after being sent home from the tour and was banished to play cricket in the Caribbean and Canada during his suspension. He returned to the Australia team last year and helped his country retain the Ashes in England in the face of boos and abuse from English crowds.
Smith and Warner are both in the Australia limited-overs team in South Africa for three Twenty20 internationals and three one-day internationals. The Aussies are touring the country for the first time since the scandal.