It seems the rules are unclear on this. I feel that its only fair as i see no discernable difference.
It must be played with 4-way restriction. This means that:
1) On arcade, you must use/show the 4-way restrictor.
2) On recent versions of MAME, 4-way restriction is built in to MAME, so it doesn't actually matter what kind of stick you use.
3) On X-in-1, it's unclear what versions of MAME they bootlegged, so you must use/show the 4-way restrictor.
The proper 4-way restriction was fixed in MAME in version 0.37b14. That obviously predates WolfMAME, but is also the general timeframe when a lot of the X-in-1 boards were made. For example, it's believed that the 39-in-1 boards are based off some 0.37 version, but the 39-in-1 has 8-way enabled, which means it predates 0.37b14 and thus it's possible that ALL X-in-1 boards have the same issue.
Multiple people (at least Hank Chien and Jon Mckinnell from my memory) have shown that there can be an advantage with an 8-way, so any control scheme or rom/MAME revision that allows 8-way control is forbidden.