Krabbe disease (KD; also called globoid cell leukodystrophy) is a genetic disorder involving demyelination of the central (CNS) and peripheral (PNS) nervous systems. The disease may be subdivided into three types; an infantile form which is most common and severe, a juvenile form, and a rare adult form. KD is an autosomal recessive disorder caused by a deficiency of galactocerebrosidase (GALC) activity in lysosomes leading to accumulation of galactoceramide and neurotoxic galactosylsphingosine (psychosine) in macrophages (globoid cells) as well as neural cells especially in oligodendrocytes and Schwann cells. This ultimately results in damage to myelin in both CNS and PNS with associated morbidity and mortality. Accumulation of psychosine, a lysolipid with detergent-like properties, over a threshold level could trigger membrane destabilization leading to cell lysis. Moreover, sub-threshold concentrations of psychosine trigger cell signaling pathways that induce oxidative stress, mitochondrial dysfunction, apoptosis, inflammation, endothelial/vascular dysfunctions, and neuronal and axonal damage. Since the proposed “psychosine hypothesis” considerable efforts have been made in search for effective therapy for lowering psychosine load using pharmacological, gene and stem cell approaches to attenuate psychosine-induced neurotoxicity. In this review, we focus on the recent advances and prospective research on understanding of disease mechanisms and therapeutic approaches for KD.