perl -pe's/\{BS\}/\b/g;1while s/.?\cH//' file
Update:In that case, we might as well do away with that redundant '?'. If there isn't a char before it, then there is nothing to backspace over!
Revenge again! :) -1 more.
In private discussion, Arien pointed out that whilst the cusor may not move back past the left hand edge of the screen if you keep pounding the backspace key, it is unlikely that the keystroke logger would have the smarts to realise that, and so would likely keep recording the useless keystrokes.
I therefore willingly accept his offer of a draw. (Drat! and double-drat! Thought I had'im that time!)
perl -pe's/\{BS\}/\b/g;1while s/.\cH//' file
Well It's better than the Abottoire, but Yorkshire! | 