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This expression was first coined in reference to hastily drawn out, or sketched, building/construction plans, which were uncertain at best and disastrous at worst. The overall thread of meaning is the same, but now applies to morality/legality. On the overall continuim of goodness, things progress, in order: safe, sketchy, shady, outright criminal.
Getting wasted and gambling away half your paycheck in Nevada may be legal, but its definitely sketchy.
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