You've touched on my initial point. This is all assuming Butters needs to be a Knight by the end of SG. I would rather Murphy was the wieldier of the sword of Faith and Butters stayed the resourceful one fighting with his brains and raw nerve.
Murphy's problem is she never could reconcile herself to the basic rules of the Swords. A Knight's job isn't to judge or execute, but to give the coin holder a chance to give up the coin and seek redemption. I think Butters is okay with that, he has always had an open mind.
No, he didn't gain his peak in Dead Beat, he only further proved what he did when he took a demotion and spent time in a mental hospital rather than take back what he witnessed on the table in the morgue. As Michael said, it isn't about the blade, maybe even not about a great fighter, it is the mind and the heart behind it.