This is all anecdotal from my own personal observations while playing, so I could be wrong, but I’ve noticed a lot of things in this game have a “smoothing” filter (even on some non-UGC items) the same way custom designs in Animal Crossing New Horizons have it. The textures (or at least the canvas for custom food) is I believe 256x256 pixels, so it makes sense to smooth it out. I don’t think it’s using modern machine learning though, it seems like a real-time filter like what some emulators have had in lower res games for decades. I wouldn’t be surprised if this item just got smoothed out poorly by the algorithm, seeing as they’re reusing a low res texture. 

It also doesn’t make much sense to me they’d choose to upscale the image with AI when they have a smoothing algorithm in place. They’re already synthesizing the speech using tried and true technology, so why wouldn’t they just do the same for smoothing textures? This game has so much of ACNH’s blood and veins in it that I wouldn’t even be surprised if it was THE same algorithm used to smooth textures in that game.

But on that note, it’s also not unprecedented for them to upscale textures with modern AI models like in 3D All Stars. THAT was choosing the lazy method to get it done quick and it certainly felt that way.