Doesn't comment editing basically destroy any protections that reddit has regarding user generated content?

Not really. To the extent that Reddit exercises editorial control over some particular content, it could theoretically become liable for that content. But just editing one comment in a database doesn't automatically make them liable for everything that everyone else does.

It introduces a precedent for content manipulation for personal gain that cannot really be prevented though. Who says that Steve Huffman won't alter content of any entity posting on reddit? Politicians can do AMAs and post responses, then Huffman comes along to sneak-edit one or two words to make them look bad without any external user being able to prove manipulation - it could just be a user edit after all.

It should have.

Unfortunately things, as a super general term, don't work properly.