I can understand the fear, but I also don't understand the fear - AFTER education. (let me explain)
In life as with anything else - there are choices. Your nephew even if he were a convicted felon - would have a choice to own, possess, have, borrow - hold a weapon that was his, or a friends. Being a felon in possession of a firearm carries a sentence of a heftier nature. Even if the gun isn't a real gun.
Dude is supposedly a convicted felon. Although depending on whom you get to run his background check? It doesn't come up on record. (Interesting). We have weapons, we shoot ours, and we enjoy having them. We're not idiots who have them laying around, we're very much into gun safety and education. When we sell -IF we sell - you have to prove to us that you have taken courses and know how to handle a lethal weapon. I'm not arming the next generation of idiots with their mistake, or reading about it on the news. If you don't like my rules go by your weapon elsewhere.
Your nephew is interested in knives. Has he ever taken a knife throwing class? Does he know how to properly sharpen a knife? Can he throw a knife? Use a knife in self defense? Can he prove any of this to you? If not then why does he carry one? My Father taught me an extremely valuable lesson when I was 15 years old. I bought myself a 10" Bowie knife. It was COOL! I put in on my belt loop and it went everywhere I did. Dad asked me the same questions I just asked you, then came up behind me, snatched my knife off of me, held it to my throat, and said - "YOU are not ready to carry a knife, and THIS is exactly why." Then threw it in the ground and walked away. His logic was sound. I was trying to look cool, and could have been killed, I had no skills, I couldn't even sharpen it. (my other great myth - I use it on stuff - like cutting hotdog skewers at camp) - fine - sharpen it - it will get dull - I had no clue. My Father wasn't a bad person - but I did learn how to handle myself after that. Either that or it stayed in the drawer. If I wanted a GUN - it would have been the same thing -
Can I clean it? Can I take care of it? Do I know how to handle it? What happens if someone tries to take it away from me? What ifs' get people killed. If your nephew went to safety classes and you both went to the range and he got respect for the weapon and saw what it could do? MAYBE the stigma wouldn't be there to want to possess something that can be fun, but in the wrong hands can be lethal. MY DF has been shooting since he was three - and about 9 months after we started dating - shot himself through his upper thigh. His gun misfired, went thorugh his leg, the couch, the floor, and into the ground under the house. Every weapon in our house has locks on them, every one has a case, all the ammunition is in a fire proof safe - There has to be precautions. And after living with a felon - you ask even MORE questions.
It could be something you and he enjoy - I believe you were a career Army man. This could be something he enjoys learning from you - or together with you. I don't believe you can stop him. He can go to Walmart and have a background check done I think for $20.00. Or any pawn shop. Maybe a little guidance in this case would go a long way to keeping tabs.
I wish you well.