The new cyber agency will also seek to protect state institutions from hackers, said presidential spokesman Johan Budi.
Chief Security Minister Wiranto said that the move was necessary to combat a flood of news on social media that was "slanderous, fake, misleading and spread hate".
"Freedom (of speech) is a right in a democracy but there is also an obligation to obey the law," he said.
It came after President Joko Widodo declared his intention at a cabinet meeting in December to combat fake news in a country where people are rapidly getting online for the first time, with over 130 million out of 255 million inhabitants now estimated to be internet users.
One of the most high-profile cases in recent times was a false claim circulating on social media in December that Beijing was seeking to wage biological warfare against Indonesia, after a true story that four Chinese citizens were arrested for using imported chilli seeds infected with bacteria on a farm south of Jakarta.
Another fake story that spread online said that millions of Chinese workers had entered Indonesia to replace local workers. It comes as anti-Chinese sentiment is running high with Jakarta's ethnic Chinese governor standing trial for alleged blasphemy.
Indonesian internet expert Nukman Luthfie said he hoped the new agency would not breach people's privacy, but added it was too early to tell.
"It would be really unfortunate if it was going to be used to monitor public discussions because that's people's right," he said.
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