On a somewhat practical -- and frighteningly co-incident -- note, just this morning a reviewer revealed his identity to me on the grounds that his own as-yet unpublished work overlaps my paper that he is currently reviewing.
As a reviewer, encountering a draft which overlaps your current project would be a bit of a nightmare scenario for a variety of straightforward reasons; I think a frank discussion with the author is mandated in such a situation so that the simultaneous development of common ideas can be properly expressed and clearly cited.
This is one situation where it seems as though the "do it blind" idea is extremely dangerous and counter-productive. You really wouldn't want to end up in a situation where you are accused of stealing ideas from unpublished work (that you were reviewing!) and then rushing your own eerily similar draft to a journal with quicker turnaround time so it gets published first. It is much better to explain the situation to both the author of that work and the editor of the journal so that everything gets sorted out transparently and amicably.