Support for Custom Dynamic Backgrounds via USB/OneDrive (MP4 & GIF)

At this time, dynamic backgrounds are only available on the Series S/X and can't be customized. If the video you saw was done on a One, then the person doing it is doing something that violates the terms of service.

If you are on a Series S/X, when you go to settings and change your background, there's a section for dynamic backgrounds.

@Mattch23

Surely using a custom Background via a USB pen drive or any other means is NOT a violation of the modification rules, otherwise there wouldn't be an option to set such a background in the picture viewer or Background options.

I have had a custom background since the old blades system i believe, if not definitly the start of NXE.

you can set your own image

https://support.xbox.com/en-GB/help/account-profile/customize-xbox-home/change-xbox-one-background

Customised image

Note Customised images must be smaller than 3 MB, and the best size for backgrounds is 1920 x 1080.

1. Copy a JPG or PNG file that you want to use to a USB device, and then plug it into your Xbox.
   
2. On your Xbox, select Customised image. A dialogue box appears that shows the contents of your console and attached USB device.
   
3. Select the USB device, and then choose your image.
   

Screenshot

1. Select Screenshot, then choose the one you want.
   
2. Select More actions (…) > Background > Set background.
   

Dynamic background

Note Dynamic backgrounds are only available on Xbox Series X|S.

1. Select Dynamic background.
   
2. Select the background art you want.
   
3. Select Apply.
   

Note Some dynamic backgrounds are only available through promotions with special edition hardware (like the 20th Anniversary Special Edition controller). To see one of these special dynamic backgrounds in your list of options, make sure your special edition hardware is turned on and in use with your console when you set your background.

Remove customised background

If you want to remove your background, select Remove customised background.

Use Microsoft Edge to set customised backgrounds

You can also set a customised image as your background while using the Microsoft Edge app on an Xbox console. To do so, find any image you like within the Microsoft Edge app, move the browser pointer over that image, select the Menu button  and then Set as background.

Just look online for a 1920x1080 image (or make one yourself) and then go into the xbox, view the picture, set as background. Sure it's not dynamic nor will it give little background items to your friends (is that even on the new dashboard?) but it's great
for customizing without spending MS points.

Check this out:
support.xbox.com/.../change-xbox-one-background

It seems that a custom image is only application from options via using an image from your Xbox One or upload an image from a USB drive.