Yes, you have to use the Saxon Engine if you want to use a later version of XSLT.
See What's new in BizTalk Server 2020: XSLT 3.0 Support (Sandro Periara's blog)
BizTalk's default XSL transform engine implementation is based on.Net Framework XSLT Transformations. This support is limited to XSLT 1.0.
Starting with BizTalk Server 2020, users can choose Saxon:registered: 9 (Saxon 9 HE) as the XSLT transform engine. But most importantly, it will be possible to plug-in your own custom XSLT transform engine.
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