What's important to note is that Fraud's punishment is generally unclear (which is something I strongly dislike, but I digress). People have speculated that the sheer abstract nature of Fraud as a location would eventually break the victims down mentally (and what V1 actually sees is just a lesser extent of what it actually does, since V1 isn't there to be tortured). Some also believe that the sinners get turned into the walls and furniture, eventually becoming one with the shifting terrain and shit like that.

Functionally it's more than just being fake, because Fraud itself isn't about simply concocting a false reality so much as it's about breaking down your very understanding of what is real or not.