European regulators have launched a formal probe into Elon Musk’s AI startup xAI after reports that its Grok model generated sexualised deepfakes of women and children. The investigation focuses on the creation and spread of these images, raising immediate legal and ethical concerns.

The probe follows a wave of complaints from advocacy groups and regulators who argue that such content violates EU data protection and child‑protection laws. If xAI fails to comply, the company could face hefty fines and restrictions on its services across the bloc.

Investors watch closely, as the outcome could set a precedent for AI firms operating in Europe. A ruling against xAI might prompt tighter oversight of generative models, while a lenient decision could embolden other startups to push the boundaries of content creation.

Analysts predict that regulators will demand robust safeguards, including stricter content filters and transparent audit trails. Meanwhile, Musk’s broader AI ambitions—spanning social media, autonomous vehicles, and space—remain under scrutiny, as any regulatory setback could ripple across his portfolio for investors.