You may find that the wall was once an exterior wall that had siding over it. Someone remodel? That being said, I think the best and easiest would just cover it with 3/8 sheetrock and be done with it. I can't see any reason to take it off the plywood unless you want to see what's under it. The sheetrock will give you a nice smooth wall. Mount the rock vertically if it's less than an 8 foot wall so you don't have any butt joints to tape and mud, just the tapered edges which are easier to finish smoothly for a DIYer. You may need extension rings for any outlet boxes, but maybe not if you had the paneling.