I think installing the hidapi package fixed the issue for me, though I also installed the xboxdrv and hidapi-32bit packages too for good measure.

I am able to reproduce this using an 8bitdo SN30 Pro+ controller in xinput mode (emulates an xbox one controller). With "Use the intercept library" enabled, Steam does not recognize the controller (though I too can get input in other applications such as sc-controller), while with the option disabled Steam recognizes the controller as an xbox one controller. However, if I put the controller in switch-mode (emulates a nintendo switch controller), I do get Steam to recognize the controller with "Use the intercept library" enabled.