When MySQL 5.7 introduced innodb_default_row_format and made ROW_FORMAT=DYNAMIC the default, it became possible to create any ROW_FORMAT tables in the InnoDB system tablespace, except ROW_FORMAT=COMPRESSED.

See for example the file mysql-test/suite/innodb/r/create_tablespace.result which contains the following line:

test/t_system        innodb_system   33      5       Dynamic 0       System

For logical behaviour, we should stop refusing explicitly specified ROW_FORMAT=DYNAMIC when innodb_file_per_table=0.
(We should still reject ROW_FORMAT=DYNAMIC and ROW_FORMAT=COMPRESSED when the deprecated setting innodb_file_format=Antelope is in effect.)