For me, it's definitely option 2. I really like the way Dark Souls handles it, where the armor sets looks the same on both genders, and everyone can be as tart or as modest as they like.

Maybe there's a case to be made for a setting in BG3 that pixelates the naughty bits, but looking through youtube comments on BG3 romance scenes (for science!), most people seem to think the nudity is funny more than anything else. The few complaints about nudity really seem to be about the fact that they have to look at a dick/gay couple, which i don't have too much sympathy for.