EU regulators are unhappy with changes Musk made to the blue badge system since anyone can now obtain it via a premium subscription, whereas previously it was reserved for verified accounts including leaders, companies and journalists, and subject to approval.
Musk overhauled the social media platform formerly known as Twitter, including changing its name, after purchasing it in October 2022.
But his plans for X have put him at odds with Brussels since the EU wants big tech to do more to protect users online and increase competition in the digital sphere.
Now, the European Commission has informed X of its preliminary view that it is "in breach" of the bloc's Digital Services Act (DSA), arguing that the social network "deceives" users with its new blue badge rules.
"Since anyone can subscribe to obtain such a 'verified' status, it negatively affects users' ability to make free and informed decisions about the authenticity of the accounts and the content they interact with," the commission said in a statement.
"There is evidence of motivated malicious actors abusing the 'verified account' to deceive users," it added.
X's chief executive Linda Yaccarino pushed back at the charge in a post on the platform, arguing that "a democratized system, allowing everyone across Europe to access verification, is better than just the privileged few being verified".
EU regulators' wide-ranging probe into X also continues to look into the spread of illegal content and the effectiveness of the platform's efforts to combat disinformation, the commission said.
Musk lashed out at Brussels in posts on X, accusing Brussels of offering it a deal to censor speech and vowing to go court over the matter.
"The DSA IS misinformation!" Musk wrote in reply to a senior EU official.
"The European Commission offered X an illegal secret deal: if we quietly censored speech without telling anyone, they would not fine us. The other platforms accepted that deal. X did not," he claimed.
The EU's top digital official, Thierry Breton, shot back, also on X: "There has never been - and will never be - any 'secret deal'. With anyone."
Breton added, in a direct message to Musk: "Up to you to decide whether to offer commitments or not.... See you (in court or not)."
- Tech in its sights -
The formal warning against X is the first under the DSA, a sweeping law that forces digital companies to do more to police content online. It follows a probe launched in December 2023.
X becomes the third company in as many weeks to face the European Union's wrath for violating landmark new rules, after Brussels warned Apple and Meta to change their ways or risk massive fines -- for breaches of a second law known as the Digital Markets Act (DMA).
The commission also accused X of failing to comply with rules on advertising transparency -- since it does "not provide a searchable and reliable" ad database -- and failing to give researchers access to public data.
"X has now the right of defence -- but if our view is confirmed we will impose fines and require significant changes," Breton said.
Fines under the DSA can go as high as six percent of a company's total worldwide annual turnover and force it to make changes to address violations.
X will be able to examine the EU's file and defend itself against Friday's finding.
There is no time limit on the investigation.
Under the DSA, X is subject to stricter regulations as one of 25 "very large" online platforms, including Facebook and TikTok, with more than 45 million monthly active users in the 27-country EU.
X is also in the EU's crosshairs for cutting its content moderation resources. In May, the EU told X to hand over "detailed information and internal documents" and demanded more information about steps taken to mitigate risks from generative AI in elections.
There are currently other investigations under the DSA into Meta's Facebook and Instagram as well as TikTok and AliExpress.
The DSA and the DMA are both part of the EU's bolstered legal armoury targeting big tech, and EU regulators have stepped up enforcement.
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