SHANGHAI (Reuters) - China's ban on initial coin offerings (ICO) is a necessary move to stop illegal fundraising and pyramid schemes but should not stop firms from studying blockchain technology, a senior central bank official told the Financial News newspaper on Tuesday.

Sun Guofeng, director general of the People's Bank of China's research institute, said in an interview with the newspaper that the central bank's move to ban the practice of creating and selling digital currencies or tokens to finance start-up projects on Sept. 4 was "necessary and timely".

"But this should not prevent relevant financial technology companies, industry bodies and other technology firms from continuing their research into blockchain technology," he said.

"Blockchain itself is a good technology, and an ICO is not the only way through which one can carry out research into it."

While there was already a sound regulatory framework for banks, it was relatively weak for technology firms which were now handling large streams of money flows, creating the risk of "regulatory arbitrage", Sun said.

For example, companies were potentially violating privacy protections by using data from online retailers and social networks to analyze consumers' personal credit conditions without their knowledge.

"In general, financial technology still holds strong risk characteristics and we must strengthen supervision," he said.

Regulators now planned to continue undertaking independent research into the financial technology system, and would seek third-party research and also assess companies' own research in order to formulate a framework.

But the technology industry would be expected to foot part of the costs for creating such a framework, he added without providing details.

(Reporting by Brenda Goh; Editing by Stephen Coates)