Check if the Exec option is disabled for your root dataset.
When relocating the .system dataset, it will inherit the "Exec=off" option of your top-level root dataset.
If you end up having to re-enable "Exec=on" for the top-level root dataset, you might need to move your .system dataset to the boot pool, and then back to the data pool.
Or you can just skip all of that and use the following command in the Shell:
zfs set exec=on mainpool/.system
Replace "mainpool" with the name of your actual pool in which the System Dataset resides.