Considering we are all born naked, we all know what it looks like, and everything else on the planet is naked, i don't know why "other then fashion" to wear clothes. ;p
Well there *ARE* some utilitarian concerns. Let's leave "freezing to death" and "deadly 3rd degree sunburns" out of it for a second.
Sand in your whatsit
frying hamburger
Working in a woodshop
It's not *JUST* for fashion that we wear clothing. We wear clothing because our brains drive us and our hands enable us to do work in conditions that our hairless thin-skinned bodies couldn't survive without protection. But you knew that.
Our society has grown accustomed to the sight of the clothed human. Even dependent upon it. Peer pressure is a valuable tool. And it keeps most of us safely clothed most of the time. We don't have to consider the reasons WHY we wear clothing.. we know that we "should". Ironically there's a reason for almost every clothing item the modern American wears. From underpants (better to stain a small piece of cotton, than your expensive jeans?) to socks which keep your feet from rubbing directly against your shoes (blisters, etc). Even the brassiere (as much as we girls may hate them sometimes) has it's benefits (walking briskly down stairs being the most vivid memory at the moment). The possible exception to this being the Tie, and the Blazer/sportcoat/suitjacket. Some of the clthing items we wear are functional only in a fashion sense (the oft maligned "slip" for one, and the descendants of the Corset/Girdle)... while others serve both utilitarian and fashion considerations (like pantyhose/stockings).
Even in the middle east, the clothing widely regarded as "repressive" probably began as an attempt to preserve the beauty of women's faces from the harsh elements of the environment (sun, wind, sand).
But why must our avatars wear clothes? Because even though SL is a simulated world, with simulated people, and simulated clothes.. the fact is that the human mind, through socialization, is strongly attached to that peer pressure that people must be clothed. And the more closely the game comes, to simulating people.. the more we will apply our social morays to them. Look at the uproar over avatars that look like children. They're no more children, than an adult avatar is naked when "clothing layers are not applied to it"... But our human mind, so good at pattern recognition and classification..... easily says "child" or "naked" for us, just when seeing some poorly rendered humanoid mesh with some deforms and textures applied.
SO... our avatars must wear clothes.. because as a society, we more or less agree that PEOPLE should wear clothes.
Is it wrong to make that connection? In this situation, Yes it probably is.
But it's not a conscious connection being made. Much like seeing shapes in clouds.. our brains will always try and "resolve" images to the closest category. That's where some basic elements of racism come from.. the classifying part anyways.
but the question isn't "is it right that we should have to cover up genitals on digital creations" the question is... "how much must we do, to live in harmony with this society, and the rules of this comany?"
And I think that some stars on the nipples on the vendor art, isn't too much to do for a little harmony. But then again.. please don't strip the genitals off the demo! if I can't see them in the vendor, OR the demo.. then I won't buy your skin.