He shouldn't use knife. It's better to summon monsters or use acid to melt the criminals in the dream.
I think he will get hurt at some point, since if he can inflict damage, so can they. But what he has to do is ALWAYS have an alibi: like record his sleeping or always make sure they see him before and after he does it in the dream, so he's covered time-wise. Either seen on a hotel camera or street camera or something. As long as he has an alibi for his location. Ideally: he should get the a hooker or some other girl to sleep NEXT TO HIM and vouch that he never left the bed.
Seems to be really interesting. I have a suspicion, that like Light from Deathnote, the MC will end up dead. Or at least in prison. I just don't see how he will be able to cover his ass until the very end, since he is connected to all three of the guys. Unless they won't be able to find concrete evidence and won't believe that supernatural stuff is involved.