Before looking at converting LUKS1 to LUKS2 you should probably check the systemd version running on the Librem 5, the feature you need is available from systemd version 248 and above, IIRC the Librem 5 currently use systemd version 247.
Things may have changed as I haven’t looked at this type of thing for about a year or so but, one difference between LUKS1 and LUKS2 is the header size, when you use the standard utils to convert LUKS1 to LUKS2 although the converted container is LUKS2 the LUKS2 header sits in the original disk space of the LUKS1 header this means that you don’t get a full LUKS2 header and some LUKS2 features don’t work. I suspect that the FIDO2 capabilities require a full LUKS2 header so even after converting LUKS1 to LUKS2 it may not work.
There is no defaulting to LUKS1, LUKS1 is all that is available, you can specify LUKS or not for the image but you don’t get a choice it LUKS1 or nothing.
When I flash a Librem 5 with an luks variant image file, I change the container to LUKS2 (and up the key size) before flashing the image to the phone. This gives me a LUKS2 container with the full header, but the main reason is that I am more familiar, and have had more success, with data recovery from LUKS2 containers than LUKS1.
It’s not much different from any other distro, the only tricky part is hooking into OSK SDL for handling pin/passphrase entry. I’m sure there a few examples of people doing just that on the PinePhone which would provide the pointers.