Globoid cell leukodystrophy (GLD) or Krabbe disease, is a fatal demyelinating disease attributed to mutations in the galactocerebrosidase (GALC) gene. Loss of function mutations in GALC result in accumulation of the glycolipid intermediate, galactosylsphingosine (psychosine). Due to the cytotoxicity of psychosine, it has been hypothesized that accumulated psychosine underlie the pathophysiology of GLD. However, the cellular mechanisms of GLD pathophysiology remain unclear. Globoid cells, multinucleated microglia/macrophages in the central nervous system (CNS), are a defining characteristic of GLD. Here we report that exposure of primary glial cultures to psychosine induces the expression and the production of matrix metalloproteinase (MMP)‐3 that mediated a morphological transformation of microglia into a multinucleated globoid cell type. Additionally, psychosine‐induced globoid cell formation from microglia was prevented by either genetic ablation or chemical inhibition of MMP‐3. These effects are microglia‐specific as peripheral macrophages exposed to psychosine did not become activated or express increased levels of MMP‐3. In the brain from twitcher mice, a murine model of human GLD, elevated MMP‐3 expression relative to wild‐type littermates was contemporaneous with disease onset and further increased with disease progression. Further, bone marrow transplantation (BMT), currently the only therapeutically beneficial treatment for GLD, did not mitigate the elevated expression of MMP‐3 in twitcher mice. Hence, elevated expression of MMP‐3 in GLD may promote microglial responses to psychosine that may represent an important pathophysiological process in this disease and its treatment.