Considering we're talking super smash bros here, not letting people 'use' canon characters in some way is probably an awful idea that will undermine the appeal of a super smash bros RP altogether. Characters with the powers of canon characters is an okay idea I guess. I don't know whether people care for character powers as much as they do their iconic characters themselves. If it turns out that it's the latter, that choice could seriously hurt the RP's appeal right off the floor. (Though it's still better than that OC ONLY. NO ARTISTIC LICENSE. FINAL DESTINATION nonsense.)
That being said, a thought occurred to me that could improve upon the compromise concept you listed. What if instead of human characters using the powers of characters, which is arguably going to come off as slightly stale and potentially put RPers off, people vaguely played as humans that not only had the powers of canon characters, but the /bodies/ as well.
This gives players the powers and physiology of a character, but allows them free reign to define their own personality (and possibly history, depending on how you play it from there.)
Think Avatar. I think Skymin might have been onto something like this in her last post.
