I understand your concerns, and I had similar doubts before. However, after further consultation, it seems that TEXs have addressed these issues in terms of KYC and wallet custody. TEXs offer transparency in both areas: they do not force users to undergo KYC verification and use self-custody wallets. They have adopted the latest ERC-4337 social recovery method for private keys, giving users the choice to:

Not add any friends to recover your private key, similar to current decentralized wallets. You must securely store your private key, as no one can help you recover it if lost.
Use account recovery (ERC-4337) by selecting trusted contacts during account creation, who participate in the recovery process when needed. This enhances asset security while avoiding risks associated with centralized storage of private keys in traditional centralized exchanges.
Both options provide transparent and secure asset management.

Regarding your point about the transparency of transaction data and activities through smart contracts not being essential, I respectfully disagree. Many issues arise in centralized exchanges and institutions due to a lack of transparency, leading to misappropriation of funds. Users are more concerned about centralized exchanges secretly using their assets for other purposes, such as covering contract liquidations or failed investments in other projects. These actions inevitably lead to severe consequences. Achieving true transparency in the process prevents such incidents from occurring and ensures a better outcome for all parties involved.

What is TEX? How is it different from CEX and DEX?
https://medium.com/@Tsp_Exchange/what-is-tex-how-is-it-different-from-cex-and-dex-dfef89ac952c