I don't know if I agree with anything you've written there, except that people have different preferences.
Morals totally
are about feelings. Of course society heavily dictates various morals, but we all have our own moral compass, based on upbringing and our own feelings. A person can "feel" something is right or wrong. Doesn't mean they are necessarily correct though. Some will say looking at drawn CP is wrong, others will say it's fine since there are no victims.
I also don't know about this "virtue signalling" argument. I don't believe the dev wrote that scene to get points with some anti-fake-CP crowd. He put it in because it was an interesting dilemma for the mc. Alex's response isn't necessarily the dev's response; it might be, but it's not a given.
But anyway, the dev providing the antagonists argument, "I would never do this in real life!" and "...Don't you understand? It's not a real kid!" is a fair argument. If it were true. But like the mc responds, "He once was."
The mc actually believes the kid may be an imprint of a real child. And what does that mean? Is the child now just a program? Is Thanatos now just a program? Do their "souls" still reside in the machine? Are they even in a machine? Like Axel says, where are the servers?
Also, the scene highlights a dilemma that will be real soon enough in our own world. When AI behaves self aware, does it have rights? Many stories and movies have been made on this topic.
Don't cheapen such an interesting subject by simply labelling it, "Virtue signalling".
"What's the difference between eating sushi and eating pussy?"
It's the rice.
Seriously, you guys haven't heard of those connotations?