The proposal is one of 35 recommendations from the Lammy review into how Black, Asian, and Minority Ethnic (BAME) people are treated within the justice system.
Before entering a plea offenders would be given the opportunity to complete a rehabilitation programme such as drug or alcohol treatment.
Successful completion would see the charges dropped while those who failed would go on to face criminal proceedings.
The idea was trialled through a pilot called Operation Turning Point, in the West Midlands, between 2011 and 2014.
Labour MP David Lammy, who led the inquiry, said that the review also highlighted evidence of “bias” and “overt discrimination” within parts of the justice system.
Figures show that BAME men and women make up just 14% of the general population of England and Wales, while behind bars they account for 25% of prisoners.
If the numbers were proportionate to the population there would be 9,000 fewer inmates, the equivalent of 12 average size prisons.
In one area of offending, drugs, it was revealed that BAME people were 240% more likely to be sent to prison than white offenders.
David Lammy, MP, told Sky News: “That is worrying and obviously something I hope the judiciary will look at intently.
“That accounted for the plea people make, for previous convictions, for gender and for age.
“So it was a detailed piece of work that has never been done before and I think it is incumbent now on the judiciary to explain what they think is going on and to look in a more detailed way, systematically, at issues of ethnicity and sentencing.”
Other recommendations include:
:: Redacting identifying information from case files passed from police to the Crown Prosecution Service so that charging decisions are “race blind”.
:: All sentencing remarks in the Crown Court should be published in audio and/or written form to improve transparency.
:: There should be a national target for greater diversity with more BAME representation in the judiciary and magistracy by 2025.
:: Youth offender panels should take place in the community with an emphasis on parenting responsibilities and accountability.
:: A US-style system for “sealing” criminal records so that ex-offenders who can prove they have reformed do not have to disclose past convictions to prospective employers.
The study also found that BAME young offenders in custody rose from 25% to 41% between 2006 and 2016 despite the overall number of young offenders falling to record lows.
Bobby Kasanga spent nearly eight years in prison for robbery offences and now works with young people in the Hackney community.
He agrees with the idea of “sealing” criminal records and “deferring” prosecution.
“One reason I started the football club and being entrepreneurial was because I had a criminal record no one wanted to hire me,” he said.
“So why allow these young men to get records in the first place if there is a chance rehabilitate themselves?
“Sometimes it’s just a mistake that you make when you’re young that can change your whole life so why not defer that decision to prosecute.”
The review also cited data showing “stark differences” in plea decisions between different ethnic groups.
Between 2006 and 2014 BAME defendants pleaded not guilty to 40% of charges compared to 31% for white defendants.
The inquiry suggested that a lack of trust was one major reason for the difference.
Mr Lammy said many BAME defendants “simply do not believe that the justice system will deliver less punitive treatment if they plead guilty”.
Robert Brown, lawyer for Corker Binnings, said that “confidence in the system was low, very low and maybe at an all time low”.
“What I am seeing now is that what was wrong with the criminal justice system at the time of the Stephen Lawrence case is wrong with the system now,” he said.
The Lammy review also estimated that the economic cost of over-representation of BAME people within the justice system was around £309m a year.