Out of the box it can play audio in the background, and now that extensions are available you can block ads as well. You don’t really need constantly updating 3rd party clients or questionable firewalls anymore if you just want usable youtube on a phone.
Not all apps send telemetry. Most free software does not. I’m not a user of it personally, but NewPipe is fully free under the GPL and it is very unlikely that it collects any private data from its users. If you have genuine information showing that it does, please relay that to F-droid so they can add a warning to its page there.