I would agree that sharpening a live blade is definately a bad idea, and playing with a live blade long enough guarantees an injury.
A novel alternative to the scaryness of a live blade is a nice thick red marker pen. Although it doesn't have the feel of a tanto it is useful to demonstrate just how difficult it is to avoid being cut in a realistic situation. If people are afraid of staining their gi, it can be done on a special evening where people wear old white T-shirts.
(Whether the philosophy of accepting death as part of life should also extend to accepting a stained gi as part of training is another question).