What version of encryption and is the system using UEFI or Legacy BIOS and is this the internal or an external KB?
Legacy BIOS only suports USB 2.0. Often, KB / Mouse are connected via USB 3.0 or to a USB 2.0 hub that is connected to the USB 3.0 bus. The only for sure port on a laptop that is USB 2.0 is the eSATA port.
However, the description of the issue being that the touch screen is working and small, it seems the system is using UEFI not Legacy BIOS. In this case, the "Always enable USB" policy option has not effect on preboot. The main option for UEFI preboot USB issues is Fastboot. Fastboot will not load all the protocols available to speed up boot times. This can result in protocols not being available. Alternatively, the UEFI firmware could be preventing initialization of a requested protocol.
To test that protocols are available and are being properly initialized, boot to the Boot device select screen and select to boot to the HDD. The KB should be available to select the boot device. This screen will load all protocols upon selecting to boot to the HDD, preboot will be loaded with the same protocols already active.