I think the 2nd player controls are still pretty wonky on MiSTer, maybe them devs need mates to actually understand that gaming isnt only about player 1 Looks like you are using the open source arduino micro pro usb encoder? Good stuff.
Edit: Odd that you couldnt get CPS1 core to work 2 player with MiSTer since Jotego's core uses the default MAME layout, which should be the same as JPAC, you might need to use the "Joystick mode" to get 2P working without mapping.
Are they weird P2 side? I played some SF2 and it seemed fine. These encoders are the old Toodles MC Cthulhu boards. Not sure what they are beyond that.