Re: Live tanto in grading
In several dojo in the UK we used live tanto's for dan grades, generally a set of 5 stylised attacks. The purpose, as I understand it, was as an exercise in calmness and control - not a demonstration of skilled technique per se.
After that, we'd swap the real knives for wooden tanto for tanto randori, where the technical skill would come more into play.
Interestingly, when I moved to Israel where the aikido is generally more rough and ready, people were horrified by the idea of using live blades (although unstandable, once you see the damage people managed to inflict on each other with wooden weapons).
As for 'reality' against knives - I recently started some Kali. Of course, it has its own 'unreality', but as trying standard aikido knife techniques against people who train constantly just to cut you - no way.