Using encryption on ham bands is illegal yes. You can use it on commercial bands if you buy a license from the FCC and ISM (common 2.4ghz/5Ghz) is mostly fair game as well. The practical reality is people are probably getting away with abusing it because the FCC is not omniscient and has limited resources. For an individual to draw the ire of the FCC they need to make a nuisance of themselves. Occasionally you hear of people getting arrested for using illegal cell jammers and the like. I can't recall hearing of someone getting caught using encryption.

For something like this to really get a crackdown you would need a watershed event like RC aircraft had with cheap drones. The point where very capable hardware became extremely cheap and accessible to people who know nothing about the hobby. The RC aircraft community effectively self policed for decades because the bar for entry was high enough that anyone getting involved had to engage with the community. Drones changed that. And the FAA had to step in and regulate. I think we are getting close with cheap Chinese radios. But even Baofengs still require programming and educating yourself. Devices like the flipper zero are far more damaging. Even though they are limited in their capabilities, they make it trivial for the user to make a nuisance of themselves in ways that are hard to ignore. Its probably a matter of time until a cheap radio hits Amazon that does everything for you and permits non hobbyists to ruin everything. Imagine something as capable as a HackRF but as easy to use as an iPhone. Then we have problems.