Frederick Bousquet of France set the previous mark of 20.94 on April 26 in Montpellier, France.
Cielo also holds the world record in the 100 freestyle, clocking 46.91 on July 30 in Rome.
The 22-year-old Brazilian won the gold medal in the 50 freestyle at last year's Beijing Olympics.
"I wanted to finish the year as the owner of the 50- and 100-meter records," Cielo said. "I woke up at 3:30 this morning from being anxious, and I didn't go back to sleep."
"This year has been a year to remember for me," he added. "I'm going to save it as a template for the rest of my career."
Cielo set the record in the long-course meet wearing the high-tech suit, which will be banned from Jan. 1. Some swimmers have already switched to the old-style, textile knee-length suits, which make them slower.