Butter Knife is not sharp, because it is a type of dinner knife, and doesn't even have a blade to speak of.
So the name Butter Knife wasn't an official designation by the Army Tactics Research Group, but rather a codename given by the Soviet people to this team. However, the Army Tactics Research Group liked it and thought that a nickname given by an enemy was a form of praise, so they adopted the name.
Just as a red-hot knife slices through butter, this is a phrase westerners use to describe powerless resistance. Therefore, the focus of Butter Knife isn't on what kind of knife it is, but rather on how this knife cuts or spreads butter.
To understand the name Butter Knife, one should see it as a verb, not a noun. In other words, any enemy in front of the Army Tactics Research Group would be as weak and powerless as butter, that's the main point.