"Customs recognises that accessing a person's smartphone or laptop can be a sensitive and personal matter, as many people will have personal items such as family photos or emails on their device," the document states.
NZ Council for Civil Liberties chair Thomas Beagle said there were a number of serious issues about the workability of such a change.
That included the sharing of computers by people, and that files could appear encrypted to Customs even if they were not.
Mr Beagle said if penalties for not providing a password or encryption key were too soft a real criminal would cop them rather than comply, but if they were too harsh innocent people would be victimised.
From a civil liberties perspective, it was "more snooping" for what appeared to be a small pay-off in terms of border protection, Mr Beagle said.
"People travel across borders with their personal laptops, particularly if they are not criminals, and they have got all their medical records, their personal files, they may have very personal photos they took with their partner, for example.
"I worry they [Customs] are seeing themselves more as a spy at the border on behalf of general law enforcement, not just for Customs purposes.
"Customs Minister Nicky Wagner said that while the agency's core role remained the same, the review would ensure the legislation governing Customs was fit for purpose.
"The Government initiated the review of the Customs and Excise Act due to the legislation's inability to efficiently respond to changes in technology and business practice.
"The review aims to modernise the legislation by simplifying its language and making it easier for the public, Customs and other agencies to use. It will also reduce the compliance burden for business."
Another possible change is related to the searching of a person's clothing. Currently, people do not have to comply if asked by a Customs officer to empty their pockets. Customs can search a person's pockets only as part of a personal search, which can only take place if an officer has reasonable cause to suspect a person has hidden certain items.
Refusing to empty your pockets is not enough on its own to establish this required level of suspicion.
Customs is considering options including requiring people to empty pockets under any circumstances, or requiring them to do so if a threshold of suspicion is met.
Public consultation on the discussion document will run until May 1.
"I encourage all New Zealanders with an interest to have their say, as this consultation phase will inform final policy proposals," Ms Wagner said.
The Green Party slammed the proposed law change on electronic devices as "completely unacceptable" and "against common perceptions of privacy".
"Customs can already access travellers' electronic devices if they get a warrant, such as for anti-money laundering and anti-terrorism purposes or other suspected criminal activities," the Green's information and communications technology spokesman Gareth Hughes said.
"No agency should be able to demand access to private information without a very good reason."
