I keep my bettas in tanks ranging from 1 gallon to 2.5 gallons. I don't feel guilty about it and I don't think it's cruel. They have clean water, the best possible food and seem very happy!
Would they be happier in a bigger tank? I have no idea....I'm not a fish! Would *I* be happier in a 20,000 square foot mansion? Heck yes! But I am just fine in my smaller house. :) I figure my fish are a heck of a lot better off than 95% of the bettas that get taken home from pet stores and stuck in a little bowl, never to be paid attention to again!
Mom to 5 bettas (Xenos, Willy, Reggie, Owen & Houdini), 2 guinea pigs, 1 turtle....oh and 2 humans! :)