In crypto's speedrun of banking history, this is 17th century goldsmith banking. You take custody of a reserve asset (gold, US dollars) and issue tradable notes in exchange (gold certs, stablecoins). This makes it easier for your customers to transfer custody of the underlying asset by trading the cert/stablecoin instead.
After a while a while you decide to make extra money by lending out the underlying reserve asset, trusting that not everyone will come to you to redeem at once. A little while after that, you don't even bother to loan out the reserve asset, but instead you just start creating new certs/stablecoins out thin air and lend those out. Pocket as much profit as you can, before sooner or later a run destroys your bank revealing that you can't cover your tradable asset.
These aren't exchanges, they are banks. They have been compared to the wild west, but that's totally unfair. Wildcat banks were far better run and stable than crypto. Yet we did away with those because they kept hurting consumers. Nowadays we only let so-called sophisticated investors take risks like that with hedge funds. And nobody should be under any illusion that those provide stability or the ability to withdraw funds in a crisis.