I don't have any experience with shiplap but I definitely wouldn't use it in the shower area. For the rest of the bathroom, it might be okay but like you mentioned, I would seal it either with a polyurethane or paint on all sides. Do you have a vapor barrier underneath your siding assuming you are talking about an exterior wall? If you do, adding another vapor barrier can lead to mold problems. You never want two vapor barriers with something in-between. If you don't, I would put up a vapor barrier especially in a bathroom environment to protect your insulation, especially as the wood ages and/if shrinks.