I believe its the transparency method used for the shadows known as alpha 2 coverage. It's cheap in terms of rendering overhead - so thats probably why they chose to implement it (that and the game was made with consoles in mind which benefit from cheap shaders). The game would run like utter shite if they'd used proper transparency.
I realize it's much faster than rendering smooth shadowing... but it's just so ugly, it detracts from the rest of the game.
Here's an especially bad example I found: http://www.neogaf.com/forum/showthread.php?t=426506&page=51
. It's a screenshot about 4 posts down this page. Geralt and Triss' whole faces are covered by this dithering, in close ups.
What doesn't make sense, if it's done to speed rendering, why does it still do this on Ultra settings? That makes Ultra kind of useless in my opinion, what's the point in having really high quality on all your other graphics if you up the quality but still have this distracting dithering every time there's a shadow on something.
If they're not going to have true smooth shadows they should just drop the smoothing altogether, it'd make for an overall improvement in how the game looks.