The 26-year-old arrives at Ewood Park on a free transfer, reuniting with manager Tony Mowbray after the pair spent time together at Middlesbrough.
Smallwood has put pen to paper on a contract that will keep him with the club until 2019, with the option of a further year on top of that.
The midfielder linked up with Rotherham initially on loan in 2014, scoring the winning penalty in the League One playoff final before joining the Millers on a permanent basis that summer.
The one-time England Under-18 international made 133 appearances for Rotherham in all, having previously come through the ranks at Middlesbrough.
Smallwood becomes Blackburn's second new signing of the summer following their relegation from the Championship last season.