Both dwarf (blue leg) and red scarlet hermit crabs have been successfully bred in captivity, however it is not an easy process and it can take months if not years for some species to mature. Hermit crabs go through many larval stages before they finally become the little guys we all know and love. Each incarnation can require wholly different environmental conditions and food then the last or next. Further complicating the issue, a larval crab won't metamorphosis into an adult without the proper cue from its environment. So, given the abundance of inexpensive wild stock, it simply isn’t commercially viable to breed crabs in captivity.
They certainly can’t reproduce in the average display aquarium. The initial larval stage for most species of hermit crab is water born. It’s also incredibly tiny; most filters will get them almost as quickly as they are released.
That doesn’t stop the crabs from mating, however. Ever see what looks like a big crab harassing a smaller one? If it’s the other way around (small harassing big), then the little one probably just wants a bigger shell. But if the bigger crab is clearly the “aggressor”, most of the time the big one is a male and he’s trying to court the smaller female. If he’s successful, they’ll both come out of their shells further then usual in a bizarre dance, and then he’ll briefly hop into her shell entirely. There he fertilizes eggs which she then carries around for the duration of the gestation period. When the eggs are ready to hatch she’ll typically find a little cave or crevice into which they may be safely inserted. Then the mother will stand guard until the babies break free and are released into the water column. Sadly, as I said before, they don’t stand a chance. Anyway, even if one can manage to raise a fully mature adult, you still have the problem of finding and supplying their first shell (which has to be smaller then you might think). Breeding hermits is a daunting task, but not an impossible one. Unfortunately, conservation is rarely enough of a reason to get people to stop buying cheaper wild specimens. As long as the bottom line starts with a dollar sign, these invaluable little critters will continue to be wrenched from the sea.
For some time I’ve been loosely working on a machine which would basically make hermits: I call it the Canceratron. By that I mean I’ve been trying to figure out a way to automate the rearing process. I figure if it requires little or no labor, perhaps it could be done cheaply enough (when you figure in shipping all the way from the Keys) to make it practical. But its just a little pet project. I don’t expect to have anything up and running anytime soon, if ever. Anyways, hope that answers some of your questions. Take it easy.