I would probably use something like 320 grit. The idea is to sand just enough to improve the grip of the fresh varnish. Resist the urge to use a power sander. Hand sanding gives you better control and allows you to spot sand more effectively. You want to use a very high quality marine spar varnish for good UV protection. Do not use a polyurethane product. I prefer Epifanes over other brands but I would also recommend Captains Spar as an alternative. You should plan to put two or more coats on. Lightly sand between coats.
You might need to get some inside the hull and also on the decks.
Are you near salt water? It looks like you have salt blooms surround the clinched tacks. Salt water corrodes/destroys the brass tacks these hulls were planked with. Hopefully that is superficial damage and not structural. When they are really badly corroded the fix is re-tacking the hull....a very time consuming and unpleasant job that is done when the canvas is off. To avoid more salt damage, try to avoid more ocean paddling and make sure to do the best you can to rinse out the boat and dry it if you do. The varnish will help somewhat but the real problem is water between the planking and the canvas...
